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This is the 6th article in a 10 part series covering all aspects of getting paid as a business.
Coming up: Maintaining A Money Mindset, Getting Paid As A Sole Trader, Getting Paid As A Limited Company, Saving For Tax & Your Future. Sign up to get the next article in your inbox so you don’t miss any.
With all the talk about making 6 figures, being a success on your own terms, having your dream life, profit is a small word little mentioned. Tax is an even smaller word mentioned even less.
Yet profit and tax are the key to having the success you want on your terms.
A business without profit is an expensive hobby. A business owner confusing income with profit, and profit for tax with profit, can be on a one way ticket back to jobs-ville. I don’t want that to happen to you.
It can be easy to run away from uncomfortable words like profit, profit for tax, adjusted profit for tax and even more fun, income tax, corporation tax, dividend tax and that glorious confusion called National Insurance.
Stay with me, because I’m going to explain what these little words mean and how important they are for you and your business. It’s ok to pour treacle on your feet so you stay sticky for the next few minutes and get stuck in to how you can unlock success for your business. Use the rest of the treacle tin to make some Jamaican dark gingerbread.
Awesome! Read on my sticky friend 🙂
Profit is the best word in business.
It’s not just the friend of those unsavoury types who only do stuff for money and have no compunction screwing people over to get it. You know the ones I mean. Edward in Pretty Woman, most of the yuppies in the 1980s.
There also isn’t anything wrong with having a business you chose only to make money (as long as you don’t screw people over).
I expect that’s not you if you’re here reading this. I expect you, like me, want a business you love that also makes you (a lot of) money.
This is where understanding comes in.
Do you know what that money is called?
Getting this one wrong is the difference between a successful business and failure. (And big business get it wrong too, so no need for guilt or shame.)
I’m going to explain what each one means and why it’s important for your business. I recommend you bookmark this article and refer back to it every 6 months and when you do next year’s planning.
Income is the money coming into your business. It’s also called turnover.
Income = money into your business
Turnover is one of the numbers HMRC wants for your self assessment tax return or corporation tax return. It’s also the number HMRC uses for compulsory VAT registration and the flat rate VAT scheme.
Turnover is important. It’s also not the money you make in your business.
Profit for tax is the money you make in your business you’re taxed on.
Profit for tax = your income – tax-deductible costs
In your self assessment tax return (if you’re a sole trader) or corporation tax return (if you’re a limited company), HMRC take away the costs you claim for tax relief from your income and tax you on the rest.
This figure is lower than your income.
Adjusted profit for tax is what you’re taxed on after variations are taken into account.
This number is only relevant for your tax return for a particular year. It’s not a number for you to keep year to year. It’s just a tax thing.
Examples of adjustments:
Profit is the money you make in your business.
Your profit for tax on your tax return isn’t your profit. Your profit is all your income minus all your costs, not just the tax-deductible ones.
That’s why it is so important to keep a record of all your costs (even though it’s the law).
Your profit is the money you have available for you. It’s lower than your profit for tax. When you’re doing your business planning and measuring your success from year to year, it’s your profit you’re measuring.
Rosie’s Top Tip: Add a column to your income spreadsheet to keep track of your annual profit from your to year. Make it easy to see your success 🙂
Read more: Am I A Sole Trader Or Limited Company?
Resources: There is more information about profit and tax in my How To Do Your Own Tax Return course.
Profit is like Jamaican gingerbread muffins. Pure love. Bring on sticky
Tax is as essential to understand as profit.
You need to know the basics.
It’s like when you make a cake. If you want a delicious cake you can share with family and friends (or eat it all yourself), you need to understand what flour, eggs, butter and sugar are (let’s not get into complications about making a vegan cake without eggs and a grain free cake without flour! It’s an example, stop distracting yourself ;))
You don’t need to know how to grow wheat and mill flour to be able to make a cake. You do need to know what flour is so you can follow the recipe.
Sometimes it’s as easy as buying a box mix and knowing what the right oven temperature is.
So read on for the kinds of tax you need to know about.
Income tax is paid on the money you make as an individual person.
When you’re a sole trader, this is your profit for tax plus taxable income you have from other sources. You pay this even if you leave the money in your business.
When you’re a director of your own limited company, it’s your salary (depending on how you’re paid, see dividend tax) plus taxable income you have from other sources.
Income tax has a basic and higher rate. When your income is £35,000 or higher, you need to consider having a limited company. There is also a personal allowance for income tax. Depending on what other money you have coming in, this may be used elsewhere so it’s not available for your sole trader business or a limited company salary.
This is why it’s so important to have coaching when starting a limited company so you are paid the best way for you and you understand what’s happening.
Rosie’s Top Tip: If you have, or recently left, a well paid job, the situation is different, so consider coaching to make the most of the tax relief available to you
Corporation tax is only paid by limited companies on their profits.
It’s one of the weird deadline anomalies with limited companies as your corporation tax is due before your corporation tax (I know, bonkers).
This is one reason why it’s so important to understand your legal obligations.
The major way you pay yourself as a limited company is by dividends.
Dividends have a better tax treatment than paying yourself it all in salary (most of the time. Please get professional help if you’re considering a limited company).
Dividend tax used to be bonkers crazy complicated.
The government have simplified it and although there is uproar about the changes, I agree with the new rules. There is now a simple dividend allowance (like the income tax allowance) and we all know where we are.
The problem for a lot of limited companies is they incorporated for tax reasons only and then the government changed the rules (which happens!). It’s my view that having a limited company always needs to be done for other reasons than just tax. It’s more equal with the new rules.
Read my articles below for more information about being a limited company and the new dividend rules.
National Insurance is a right nutter of a tax.
Fortunately for you, I have handy articles explaining the lot in simple terms.
A reduction in paying National Insurance (and income tax) is one reason people like limited companies for lower tax bills when your overall income is near or into higher rate income tax.
You need to understand how it works, even when your accountant does it all for you. After all, it’s your money, not theirs. Consider coaching with me to help you.
The most important action you can take is to get started.
Bring on sticky and get stuck into becoming confident with your profit and tax numbers.
If you’re not ready for 1:1, consider my How To Do Your Tax Return course, which guides you through your tax return and calculating and paying your tax.
This article is part of a series about getting paid as a business.
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