Set up an automatic payment from your business bank account to your personal spending account (this is called drawings). Preferably, you’d keep this limited to the amount you’ll need to get by, but if you need a little extra from time to time, that’s OK (as long as your creditors are still getting paid). These are drawings as well.
How not to pay yourself
It’s not a good idea to pay your personal expenses with business bank accounts. Not only does it make filing your tax returns harder, it blurs the reality of how much cash your business has available.
Do you pay tax on drawings?
Drawings is the term we give to money taken out of the business by owners.
The key is that you don’t pay tax on drawings, but you do pay tax on the overall profit your business makes. Here’s how we approach it:
Tax on profit
Beany will look at your end of year profits (all the income less all the claimable expenses). Then,
If you’re a sole trader:
You’ll pay tax on the profit the business has made.
If you trade as a company:
You – a shareholder – will likely have a lower overall tax rate than the company, so we’ll allocate you a salary from the company’s profit. This is a non-cash adjustment recorded by your accountant and is called a shareholder salary – it will be included in your personal tax return. After deducting your shareholder salary from the business’s profits, any remaining profit will be taxed in the company’s name.
Here’s how we’ll figure out how much tax to pay
Your Beany accountant will prepare a tax return, which shows the shareholder salary allocated to you (if you’re a company) or the business profit if you’re a sole trader. Your tax return will then be filed with the IRD, which is how they know you’re receiving money from your business.
The tax return will show exactly how much tax you need to pay. And your accountant, along with Beany Tax-IQ, will let you know when it’s due for payment. All sorted.
But what if you prefer to pay tax as you go?
It’s more administration intensive, but you can instead choose to pay tax each pay period.
If you’ve opted to run as a company, you can register as an employer and set yourself up as an employee. You’ll need a payroll system that files payroll returns when they’re due, alongside keeping the proper records.
Something to be mindful of is paying yourself more than your business makes in profit. This will lead to overpaying tax. So, we recommend speaking to your Beany accountant if you’re interested in this approach.
We recommend one move to everyone: make sure you’re always able to pay tax as it falls due. Set aside 30% of your sales in a separate bank account as soon as you receive the money. If you keep it reserved for future tax bills, you won’t ever find yourself panicking when tax time rolls around.
The Accounting Income Method (AIM) – a tax filing option
AIM involves making a series of small tax returns – filed every two months with the tax paid (similar to how GST works). AIM is well suited to a few business types, like those that are highly seasonal.
The third option is to look at using a different method of filing tax returns called the Accounting Income Method, or AIM. In a nutshell, AIM is a series of mini tax returns filed every two months, with the tax paid on each return, similar to how GST works. AIM really suits certain types of businesses such as those that are highly seasonal.
You can learn more about AIM on Inland Revenue’s website.
You can chat with our support team and see what’s best for you. [email protected] or 0800 755 333.