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Stage 3: Drawings

Subsections : Business Budget |Household Budget |Interactive Budget Sheet |

Tax Sheet (73KB)

When you deduct your average monthly costs from your average monthly receipts, you have a figure for profit before tax.

In order to work out how much you can afford to draw from the business each month, it is wise to make a rough calculation of how much tax you will have to pay and to keep this amount aside for when the tax bill comes in. You can also roughly work out how much national insurance you will have to pay.

If you are a sole trader or in a partnership,you are taxed on profit before drawings, not how much (or little) you draw from the business. The tax position is different for limited companies – phone us for advice.

It is our experience at Business Debtline that many self-employed people get into difficulty paying their income tax and national insurance because they haven’t budgeted for it as a ‘cost of trading’ before they draw money for themselves.

If you do not take into account income tax and national insurance, this may give a false impression that you can earn more from your business than is actually possible.

Tax allowances change regularly. See our tax sheet for up-to-date details.

See also our fact sheet on calculating income tax and national insurance at the current rates.

Self-Assessment – Income Tax

Self-assessment was introduced from April 1996. Requirements include keeping proper records, completing of a new-style tax return and making payments on account.

It is important that you are familiar with the requirements and timescales for sending in the return and making tax payments, as there are fines for late returns and payments.

If you have problems calculating your estimated income tax and national insurance or have any queries on self-assessment, phone us for advice.

When you have worked out your estimated income tax and national insurance, the next stage is to see if the amount available for drawings is enough to cover your essential living expenses, i.e. your monthly outgoings as shown in the business and household budget.

Before doing this, you should first see if there are ways to increase your income. Any other additional sources of income can then also be included in your budget.

If there is nothing left for drawings, phone us for advice.

Go to Stage 4: Household Income
Go back to Stage 1: Business Income
Go back to Stage 2: Business Costs

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