[UK] Sole trader- confused about big tax bill
March 14, 2021 10:26 PM Subscribe
So I'm embarrassed about this - hence posting anonymously. I have an accountant for my sole trader business. We're coming up to the financial year end and the business has done surprisingly well, considering, well - you know.
I just don't know whether I should spend some money on new infrastructure, fittings - fixtures, technology, office supplies etc at this point to reduce our tax liability a bit.
We've qualified for quite a few of the government grants, none of the recent ones but the early April-September last year ones.
Our expenses are much reduced due to things like no rates, lower staff bills etc.
Our sales are slightly down but because of grants and lower expenditure, and reasonably decent sales (relatively speaking)...we're on track for our best ever year this year.
Our tax bill is going to be the biggest it's ever been. We DO have money set aside for this.
Anyway so here's the rub. I've tried asking the accountant again and again what we can do about the 'surplus' cash in the business. Either he's not answering clearly (or at all) or I'm not understanding his answers or I'm asking the wrong question.
Basically I'm wondering if I buy myself a new business phone, say, or buy new logo blinds for our windows at the office to spruce things up a bit - is this a wise thing to do tax wise? Will it reduce our tax bill OR just make it look on the P&L ??
As you can see, numbers are not my thing. Happily, that's not my day job. Thank goodness.
Thank you
We've qualified for quite a few of the government grants, none of the recent ones but the early April-September last year ones.
Our expenses are much reduced due to things like no rates, lower staff bills etc.
Our sales are slightly down but because of grants and lower expenditure, and reasonably decent sales (relatively speaking)...we're on track for our best ever year this year.
Our tax bill is going to be the biggest it's ever been. We DO have money set aside for this.
Anyway so here's the rub. I've tried asking the accountant again and again what we can do about the 'surplus' cash in the business. Either he's not answering clearly (or at all) or I'm not understanding his answers or I'm asking the wrong question.
Basically I'm wondering if I buy myself a new business phone, say, or buy new logo blinds for our windows at the office to spruce things up a bit - is this a wise thing to do tax wise? Will it reduce our tax bill OR just make it look on the P&L ??
As you can see, numbers are not my thing. Happily, that's not my day job. Thank goodness.
Thank you
Serious question: why do you want to reduce your tax bill? You've received grants and they are part of the reason that you have surplus cash. Why don't you regift that money, in a roundabout way, by paying the tax you will owe without spending on frivolous items.
Alternatively, can your business make a tax deductible donation to an appealing cause?
posted by Thella at 11:43 PM on March 14, 2021 [8 favorites]
Alternatively, can your business make a tax deductible donation to an appealing cause?
posted by Thella at 11:43 PM on March 14, 2021 [8 favorites]
Buying stuff your business needs in a year when you have more than enough revenue to pay for it makes perfect financial sense.
Buying stuff now that you would not otherwise buy and are only buying to reduce your tax bill makes no financial sense whatsoever.
Taxes are charged as a percentage of what you make. If you're paying less tax that's because you've made less money.
posted by flabdablet at 2:14 AM on March 15, 2021 [6 favorites]
Buying stuff now that you would not otherwise buy and are only buying to reduce your tax bill makes no financial sense whatsoever.
Taxes are charged as a percentage of what you make. If you're paying less tax that's because you've made less money.
posted by flabdablet at 2:14 AM on March 15, 2021 [6 favorites]
I am in the same position as you and am paying the extra tax. It doesn't make sense to buy things you would not otherwise have bought.
posted by dowcrag at 3:14 AM on March 15, 2021
posted by dowcrag at 3:14 AM on March 15, 2021
I think you may need a better/different accountant. You should 100% be taking advice from an accountant specialising in small businesses and not people on the internet who may not even be in the same continent as you...
Putting any dividend into your pension fund for example may well be worthwhile. You can then get tax relief on that (rather than paying tax) and you can use your pension fund in the future to purchase assets such as property and get double tax relief. But that was told to me by an old boss 10 years ago in an informal chat when I was thinking of going self-employed. It sounds like it could be true, but I may have misunderstood a decade-old conversation, or the rules may have changed since then. Anyone on the internet can turn out to be a dog.
posted by Hartster at 4:11 AM on March 15, 2021 [2 favorites]
Putting any dividend into your pension fund for example may well be worthwhile. You can then get tax relief on that (rather than paying tax) and you can use your pension fund in the future to purchase assets such as property and get double tax relief. But that was told to me by an old boss 10 years ago in an informal chat when I was thinking of going self-employed. It sounds like it could be true, but I may have misunderstood a decade-old conversation, or the rules may have changed since then. Anyone on the internet can turn out to be a dog.
posted by Hartster at 4:11 AM on March 15, 2021 [2 favorites]
As a sole trader, your income tax is calculated on the profit your business makes. If you have more expenses, you make less profit, and your tax is less. How much less depends on what tax bracket you're in.
Here's an example. Say I'm a sole trader and I made £20,000 profit this year. My income tax is charged at the basic rate (20%) on the portion of my income above the personal allowance (currently £12,500), so my income tax is 20% of (£20,000 - £12,500), which comes out to £1,500.
If, before the end of the tax year, I buy some new stuff for the business worth £1,000 and record it as an expense, then my profit is only £19,000. My income tax bill is now 20% of (£19,000 - £12,500), which comes out to £1,300. I spent £1,000 but owe £200 less tax.
The practical upshot after paying the tax bill, is that I am £800 poorer than I would have been if I hadn't bought the new equipment, but I have £1,000 worth of stuff. It's as if I got a 20% discount on the stuff I bought. There's no point in spending money on stuff I won't use, but if I would otherwise purchase it at a 20% discount, then it's a good deal for me.
This is a simplified example, and likely be an underestimate of how much you save on your tax bill for expenses. If you make enough to pay income tax at higher (40%) or additional (45%) rate, you'll save more, and you'll also save on Class 4 National Insurance, which is calculated as a percentage of profits above £9,501. Depending on what you're spending money on, it may be treated as business expenses or capital allowance, both of which are deducted from profits but which have different long-term implications.
This is general advice based on the information you've given; I am not your accountant and I don't know your personal tax situation. Your accountant is much more qualified to advise you.
posted by spielzebub at 5:18 AM on March 15, 2021 [2 favorites]
Here's an example. Say I'm a sole trader and I made £20,000 profit this year. My income tax is charged at the basic rate (20%) on the portion of my income above the personal allowance (currently £12,500), so my income tax is 20% of (£20,000 - £12,500), which comes out to £1,500.
If, before the end of the tax year, I buy some new stuff for the business worth £1,000 and record it as an expense, then my profit is only £19,000. My income tax bill is now 20% of (£19,000 - £12,500), which comes out to £1,300. I spent £1,000 but owe £200 less tax.
The practical upshot after paying the tax bill, is that I am £800 poorer than I would have been if I hadn't bought the new equipment, but I have £1,000 worth of stuff. It's as if I got a 20% discount on the stuff I bought. There's no point in spending money on stuff I won't use, but if I would otherwise purchase it at a 20% discount, then it's a good deal for me.
This is a simplified example, and likely be an underestimate of how much you save on your tax bill for expenses. If you make enough to pay income tax at higher (40%) or additional (45%) rate, you'll save more, and you'll also save on Class 4 National Insurance, which is calculated as a percentage of profits above £9,501. Depending on what you're spending money on, it may be treated as business expenses or capital allowance, both of which are deducted from profits but which have different long-term implications.
This is general advice based on the information you've given; I am not your accountant and I don't know your personal tax situation. Your accountant is much more qualified to advise you.
posted by spielzebub at 5:18 AM on March 15, 2021 [2 favorites]
If you were planning to buy the stuff anyway, in the next year or so, them yes, it makes sense to buy it now.
If it’s stuff that you would buy if it was, say, 20% cheaper then it might make sense because you’ll sort of end up paying that amount.
Otherwise, no, pay the tax.
(Regarding Hartster’s remembered conversation - it sounds like that was for if you have a limited company (given the “dividends”) which isn’t the case for you as a sole trader.)
posted by fabius at 6:01 AM on March 15, 2021 [1 favorite]
If it’s stuff that you would buy if it was, say, 20% cheaper then it might make sense because you’ll sort of end up paying that amount.
Otherwise, no, pay the tax.
(Regarding Hartster’s remembered conversation - it sounds like that was for if you have a limited company (given the “dividends”) which isn’t the case for you as a sole trader.)
posted by fabius at 6:01 AM on March 15, 2021 [1 favorite]
If you are a 40% tax payer then extra pension contributions are a good value thing to do with surplus. Afterwards you'll still have all the money (not the office supplies company), and it will be earning a return for you between now and retirement.
Spending £1000 on something you don't need in order to save £200 or even £400 in tax is not financially sound, as others have already said. But investing £1000 pre tax, in the future growth of your business (or pension fund) is exactly why this tax "loophole" was invented.
posted by quacks like a duck at 6:11 AM on March 15, 2021 [3 favorites]
Spending £1000 on something you don't need in order to save £200 or even £400 in tax is not financially sound, as others have already said. But investing £1000 pre tax, in the future growth of your business (or pension fund) is exactly why this tax "loophole" was invented.
posted by quacks like a duck at 6:11 AM on March 15, 2021 [3 favorites]
This thread is closed to new comments.
I think there's something more subtle to your question. The simple answer is - buy something if it is worth buying for your business, but don't buy it just for a tax deduction.
posted by saeculorum at 10:56 PM on March 14, 2021 [5 favorites]