As a self-employed business owner these are some of the names you will have heard for the money you make from your business. While all are relevant some have very specific meanings within the accounts and tax arenas so understanding the subtle differences can help to avoid awkward situations or providing the wrong information.
Set out below is our helpful guide to help navigate this maze of meanings.
- Income – When referred to as the business’s income, this is the sales income of the business before the deduction of expenses.
Just to throw an early curve ball in, when referred to as your personal income, this is the taxable profit that will appear on your Self Assessment tax return and will be the figure to quote to places such as mortgage lenders, CSA and the Student Finance bodies.
- Earnings – This is the same as your personal income.
- Profits – At its simplest it is the business income less the business expenses. But just to confuse things, the profit shown on the accounts is not necessarily the taxable profit as there are adjustments that are made for transactions that are not wholly claimable for tax purposes (such as entertaining clients) or partly claimable for tax purposes (such as restrictions made for private usage of motor expenses).
- Wages – While some self-employed business owners refer to the money they withdraw from the business as their ‘wages’ this is incorrect. In accountant’s speak, wages are only ever paid to a third party, who is an employee of the business, never the self-employed owner.
- Drawings – This is the correct terminology for the money withdrawn from the business or other such personal expenses paid from the business.
Hopefully that’s all nice and clear!
In the tax year2019/20 you can earn £12,500 of earnings before tax at 20% becomes payable. However, National Insurance at 9% is payable on earnings over £8,628 with a further £153 of additional National Insurance being paid which replaced the monthly/quarterly direct debit payments that some of you may remember.
When it comes to how should you pay yourself, the advice is much simpler. We would always recommend operating the business through a separate bank account then making a transfer from the business’s bank account to your own personal bank account clearly labelled ‘drawings’.
We hope that this helps but if you would like to know more about what you earn, the tax you pay and how you can work smarter then please contact us for a no obligation appointment on 01302 752700 or by email to firstname.lastname@example.org