How do you explain to someone they are taxed on the businesses' profits not what they take out of the business?
My brother's wife has asked me how much she can take out her business (started last May) without being taxed. I've tried explaining she wont pay tax on the first £6475 of her profits and she won't pay any Class 4 NI on the first £5715 of her profits.
I've told her it doesn't make any difference if she takes out 1p or £10,000 - she will be taxed on the same figure. I'm having trouble explaining it to her in a form she can understand. Because she is used to receiving a wage it is a concept she can't grasp. She's not alone. I've had other people with this same concept.....but I'm useless at getting across the way they are taxed. I know what I mean - I just can't put it into terms others can. Not very good at the english language (despite it being the only language I know).
Anyone know a simple way to explain the concept rather than tell them to read the HMRC website?
__________________
Never buy black socks from a normal shop. They shaft you every time.
The business has income (from sales or services provided), it also has expenditure (from purchases of items to sell, costs of selling them, overheads - stationery, insurance, etc). The difference between the income and expenditure is the profit which is taxed at 20% on anything above 6475 and 8% on anything over 5715. As long as she saves double this money to hand over the the taxman (To allow for an extra half of it to be paid at end Jan and again end of July) she can do what she likes with the rest either spend it or save it. It might help if you draw her a diagram. If the profit is less than the above figures the lot is hers.
