HMRC -TAX CREDITS - SELF EMPLOYED

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BenA
BenA Registered Posts: 56
in General discussion
Can someone help please? Why do HMRC want to know your self-employed sole trader profits when calculating Tax Credits rather than the amount of drawings a person will take each month? A friend is looking to leave their current job, they are currently in employed, to become a sole-trader. To do this they need to know the tax credits they will be entitled to (if any, hopefully they will be successful enough not to need credits). They are looking to take a set amount in drawings each month and leave the remainder in the business to enable the business to grow (buy more advance equipment etc), but HRMC do not seem to be considering the growth factor. Is there something my friend and I are missing?

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  • Christina
    Christina Registered Posts: 33 New contributor 🐸
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    Hi Ben

    I think this causes a lot of confusion.

    As a sole trader your friend, and the business they will run, are one entity. Therefore the total profit made (after all allowable expenses) will be considered with regards to tax credits, and income tax/national insurance. Whatever drawings they decide to take will make no difference to the tax credits award, or the eventual tax bill, as drawings are not an allowable expense of the business for tax purposes.

    For just the money taken out of the business for personal use to be considered for income tax/tax credits purposes, that would be a Limited Company structure. A Limited Company and its owners are separate entities. If your friend is considering forming a Limited Company I would strongly suggest they seek the advice of a qualified accountant as there are certain responsibilities and requirements to adhere to.

    I hope this makes things clearer for you and your friend. More information about business structures can be found here https://gov.uk/business-legal-structures

    Christina

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