Sole Trader: Repay Company loan or increase wage to up income

[Culchie]

mod note thread split from here:Ltd Co; repay loan from wife or increase husband's wage to up income? (tax question)

I have a similar question. so keep it in the same thread rather than start another.

I will be talking to my accountant in the next couple of weeks, left him alone whilst all the October 31st self assessment stuff was coming in.

My question is as follows.

I set up business in March this year (sole trader), and up until now, I haven't taken any money out of the business for wages (being living off my wifes steady income). The financing of the business start up was from savings, not a loan from bank.

Now I'm at a stage, having hired in more people and bought extra machinery etc... where the business is in a position that can sustain me taking some income.

In the back of my head, something is telling me that I should withdraw up to whatever my tax free allowance is for the year, even if it's a lump sum, otherwise I lose it for next year. Is this correct?

Should this be a repayment of directors loan in the books ...i.e Tax free?

 

[contemporary]

Re: repay Co. loan or increase wage to up income

how can it be a directors loan if you are a sole trader?

 

[extopia]

Re: Ltd Co; repay loan from wife or increase husband's wage to up income? (tax question)

As a sole trader you are taxed on your assessable profit for the year, regardless of how much money you actually took out of the business, so it doesn't matter whether you take out your "tax free" amount or not.

Get your accountant to explain this in more detail.

 

[simplyjoe]

Re: Ltd Co; repay loan from wife or increase husband's wage to up income? (tax question)

As a sole trader you get taxed on the profit not your drawings. Example

1. Assessable Profit 50,000 Drawings 10,000 You get taxed on 50,000
2. Assessable Profit 50,000 Drawings 70,000 You get taxed on 50,000

 

[yob]

Re: Ltd Co; repay loan from wife or increase husband's wage to up income? (tax question)

hi guy's,
much the same kind of question,switched to a ltd co' 12 months ago,gave a directors loan of 25k to start on an even keel,money is now available to repay loan,accountant wants me to top up pensions for the 2 directors for obvious reasons,now if i do that i cant refund the loan without going into overdraft,should i leave the monies in the co' and take it later,or should i take it and let the co'go into overdraft,as i can forsee the same problem next year,haven said that i dont need the money at the moment,or maybe i shouldn't worry about the pension as were paying 1k per month each already,age 43.
thanks in advance for help.
yob

 

[simplyjoe]

Re: Ltd Co; repay loan from wife or increase husband's wage to up income? (tax question)

Hard to reply without having all the details.
Option 1. At aged 43 you should be putting as much as possible into your pension. As opposed to taking salary with tax savings a pension contribution is probably the best immediate investment return one can get. Why do you need to take out the 25K? Leave it there.
Option 2. The opposite of this is also to be considered. Why would a company consider a pension investment if it cannot afford it. It seems to me that the accountant is advising you to pay the pension out of your own money not the company money. What does the accountant make from the pension investment? Consider whether his advice is warped by his potential commission.

 

[yob]

Re: Ltd Co; repay loan from wife or increase husband's wage to up income? (tax question)

thanks simplyjoe,
the company has a tax liability,so it can either pay the tax man or invest in directors pensions,so its more a cashflow question,is it worth paying into pension and having an overdraft,or pay tax and no overdraft,or a smaller one,my pension adviser is seperate to my accountant

 

[ajapale]

Re: repay Co. loan or increase wage to up income

I have a similar question. so keep it in the same thread rather than start another.

In general a new question deserves its own thread.

I have split your question from the original.

aj