Avoid this sole trader mistake

One of the big questions in business is how will you, as the owner, be paid. As a sole trader, this has been known to go wrong, with examples in my client base almost falling for this easy mistake.

As a sole trader, money that you take 'out' of your business to pay for everyday life should be treated like a cash withdrawal or bank transfer. That seems sensible enough but, to take it a step further, these transfers are not an expense and they cannot be included as wages or a salary on your tax return.

Luckily I caught this on a client's records recently before a huge 'made up' expense was claimed.

This is all because a sole trader has no legal distinction with their business. You are one and the same in HMRCs eyes and in the eyes of company law. That means you can't really invoice yourself for the work you put into.. yourself?

Instead, when posting or categorising those transactions, mark them as cash movements or withdrawals and make sure they don't enter your income or expenses.

As a Limited company, it is even more different and I will cover this in more detail elsewhere. Most often though, in summary, you withdraw funds from a company by dividends or by operating payroll, each which has their own rules and red tape.

It is very important you have an understanding of your business structure and its quirks, or why you have an accountant to ask all of the silly questions (disclaimer: no question is silly).