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Keeping track of personal income

What are the the types of income a small business owner may have and how do can he/she keep track of it? 

What are the main sources of personal income?

Individuals may have the following types of income:

  • Salary payments

    You will only receive these if you treated as an employee or director of either your own company or another, unconnected company. When you are doing your tax return, the salary that you have received will need to be included. However, if you have already paid tax on this through the pay-as-you-earn (PAYE) system, this will be deducted, so you won’t pay tax twice. You need to keep your payslips, and more importantly a P60 (which you will be given by your employer).

  • Drawings

    You don’t pay tax on drawings per se. Any drawings i.e. money that a sole trader or partner in a partnership takes out of their business is not treated as an expense of the business. The individual will pay tax on the business profits instead.

  • Dividends

    Dividends are the return you get on the shares you own in a company. Dividends need to be included on your tax return. From April 2016, the first £5,000 of dividend income that an individual receives is tax free. You must keep dividend vouchers as these will be required to complete your tax return.

  • Interest

    Some interest that you receive may be tax free such as interest earned on an ISA. This interest does not need to be included on your tax return. Other interest that you earn on current accounts, bonds and savings accounts is usually taxable. From April 2016, basic rate taxpayers can earn £1,000 of bank interest tax free; higher rate taxpayers £500. Any income in excess of this will be taxable. You need to keep documentation i.e bank statements showing all of the interest you have earned.

  • Rental income

    Rental income is taxable. Certain expenses can be deducted from rental income such as agency fees and maintenance costs. Capital costs such as enhancements to the building are not deductible. Interest payable on a buy to let mortgage are currently deductible against rental income, but this is expected to change from April 2017. There are special rules when letting out properties that are furnished, renting out holiday lets and letting a room in your home. It is recommended you speak to an accountant or tax professional so they can provide you with the latest rules You will need to keep your rental contracts, and keep track of the rent paid by tenants. You will also need to keep a record of all of the costs you have incurred.

  • Pensions etc

    Pension income is taxable income and will need to go on your tax return. There are tax advantages to making pension payments. The way in which the advantage works depends on whether you are paying into a workplace pension or personal pension. Get advice on this before making any pension decisions. 

What do I need to report on my Self Assessment tax return?

All taxable income will need to be reported on your tax return. ISA interest and other non-taxable income such premium bond winnings or casual gambling profits do not need to be reported.

What tax do I need to pay on personal income?

There are special rules when it comes to taxing your taxable personal income.

Remember you are entitled to your personal allowance which is £11,850 from 6 April 2018 (this is restricted once your income reaches £100,000).

Non-savings income is taxed first. This includes:

  • Salary
  • Trade profits
  • Rental income.

Bank interest is taxed second. The rates of tax that you apply are:

  • 20% (for the first £34,500 of taxable income)
  • 40% for the next £115,500 
  • 45% for any income in excess of £150,000.

Dividends are taxed last. The first £2,000 of dividends are taxed at 0%, and then 7.5%, 32.5% and 38.1%, where they are taxed at the basic, higher or additional rates.

What records do I need to keep?

You need to keep P60s for salary and employment income, accounts and trade profit computations for taxable trade profits, bank statements for reportable bank interest, rental statements for rental income, pension statements for pension income and dividend vouchers for dividend income.

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