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How to deal with money you pay yourself?
So every month I make a transfer from my business account to my personal account. Call it pay, call it salary, I don't know what. I'm also not sure what you call it in FreeAgent and for tax.
I have until now called this merely a transfer from one account to another. But should I call it "Drawings"? Adding "Drawings" transactions seems to reduce the taxable income - which actually seems like a good thing (?)
Any help please?
I have until now called this merely a transfer from one account to another. But should I call it "Drawings"? Adding "Drawings" transactions seems to reduce the taxable income - which actually seems like a good thing (?)
Any help please?
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Inappropriate?Robert,
We're probably confusing things with those Personal bank accounts - they're really intended for sole traders without business bank accounts.
So you should explain that transaction as 'Drawings' rather than as a transfer.
That shouldn't affect your taxable income (it appears after Operating Profit in the P&L and shouldn't appear at all on the Self Assessed Income Tax page).
If it does, there's something not quite right... -
Inappropriate?- Indeed, it doesn't affect Operating Profit (though Retained Profit is reduced). So I guess it's *Operating* Profit that one is taxed on?
- I use FreeAgent for both my Business Account and a Personal Account. Flagging a transaction as a transfer seems to have the neat side-effect of identifying that transaction in both accounts. So, if I flag the amount going out of the Business Account as a drawing instead, I guess I should log an equivalent incoming transaction on the Personal Account... But how? Peraps as a Transfer... ?
- Whenever I try to edit a transaction marked as a Transfer from the account to another, I find that the entry type and destination account (or, source account in the case of the reverse), are *locked*. As I look to re-describe these Transfer entries as Drawings (per your advice), this means I'm having to delete each entry and recreate it.2 Comments
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"So, if I flag the amount going out of the Business Account as a drawing instead, I guess I should log an equivalent incoming transaction on the Personal Account... But how? Peraps as a Transfer... ?"
Actually, that wouldn't work either - because it just recreates the outgoing transfer I delete form the Business Account. Erk! Just wasted a bunch of time. -
Maybe the amount drawn in to the personal account should, on the personal account, be flagged as "Receipt into a Contra Account"?
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Inappropriate?Follow-up question...
- As well as drawing money in to my personal account to live on, I also transfer an amount to a separate account - just a regular bank account but one which I regard as savings. -
Inappropriate?Robert, have you considered setting up payroll in FreeAgent so you can pay and tax yourself using PAYE? It makes things a lot easier when it comes to calculating tax owed. (I'm assuming you're running a Ltd company and don't want to take all of your earnings as a dividend).1 Comment Add a comment
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Luke,
I'm a sole trader, rather than a limited company.
Does this still apply to me? -
Inappropriate?Disclaimer: IANAA
I run a Ltd but my understanding is that as a sole trader all profit is taxes as personal income whether or not you draw the money from the business account.
So I would explain the txn as a drawing, but could the problem here be related to how "personal" accounts work in freeagent? -
Inappropriate?Robert - any money moved out of your business account is a Drawing (if you don't have any payroll set up for yourself, and there's no reason why you should).
Luke's right - it's about the way personal accounts work in FreeAgent. Transfers are really 'transfers between business accounts' and we shouldn't allow them to apply to business-personal account transfers. We also 'lock' those transfers once they're created (or at least the fact that they're transfers, not the amount or date) since there are lots of side effects to changing the type in those cases and it's pretty easy just to delete and re-create the explanation.
It's no problem to explain the money leaving the business account as a 'drawing' and than not explain the other end of that transfer at all.
You should treat the transfers into your savings account in the same way.
Hope that's slightly clearer now. We're going to have a chat here at FreeAgent Central Towers about how to simplify and clarify this... -
Inappropriate?If you guys fancy releasing "FreeAgent: Personal Edition" for managing personal finances, you'll be my heroes ;)
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You know, we've talked about it, but lets just do one thing at a time :)
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Actually, that would be a really handy product. I'd buy it.
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