For about a year now I have been doing the bookkeeping for a small housing association. I am now helping a friend manage her bookkeeping and it is quite different from doing a Housing Association to a person thats self employed.
So far I have created a cashbook and pettycash spreadsheet. I am scratching my head a bit as I know that she will pay tax through her self assessment shortly but how do I account for this in the cashbook? I don't think it would be classed as an expense so would not be included in her next self assessment?
How do other people account for Tax and NIC for the self employed?
Basically it is not part of the accounts. Tax and national insurance is a personal payment, which has nothing to do with business. Even more so if the tax liability is due to other incomes too (another business, investments, property lets etc.)
The tax/ Ni is calculated after the profit has been calculated. Then deductions are made for dissallowable items, and additions for allowances allowed for tax purpose. The business P&L is just a starting point
Any payments to HMRC for tax and national insurance taken from business funds would be drawings.
Another option for sole traders and partnerships is to show tax reserves on the balance sheet of the accounts. This only tends to work well for larger sole traders and partnerships where they manage their business transactions efficiently.
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Phil Hendy, The Accountancy Mentor
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