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TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15979
Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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Hi I am self employed with a total income of £16145 with expenses

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Hi I am self employed with a total income of £16145 with expenses of £4681 = net profit of £11464. I also lent myself £10000 during the year and bought a new car for £18800 using my own money. I also paid myself back £3100 off the loan. The car is used for 90% business use and I can claim capital allowances of £3046.

My question is how do I account for the £10000 I lent myself minus the £3100 I took out and how do I account for the £18800 I paid in cash for the car


Unless your self-employed accounts include a balance sheet which is not compulsory, all you need to do is keep a note of what the money you drew out of your business account was for. Likewise, with the repayments going back into your business account. A balance sheet records the assets and liabilities of the business and is a snapshot of the value of the business assets at a specific point in time, ie the last day of your accounting period.

The point about being self-employed is that you are the business and that it really doesn't matter how much money you draw from your business account or even your personal account if you use that for business transactions or what the money is used for, though you would record business expenses. Even if you drew nothing for a whole year, you would still pay tax and national insurance contributions on your profit for the year as adjusted for disallowable expenses and capital allowances.

The purchase of the car is not a business expense in the same way that your fuel costs and other everyday business expenses are and should not be recorded in your profit and loss account. You are claiming capital allowances. If you claimed a business mileage allowance instead of capital allowances, that figure would go into your profit and loss account as a business expense.

The only situation where you only pay personal tax and nic on what you draw from a business account is if that business is a limited company and you are the director/shareholder. The company itself will pay corporation tax on its profits as it is a different tax entity to you.

I hope this helps but let me know if you have any further questions.

Customer: replied 4 years ago.

Thanks for that - and just so I am clear from a tax return perspective do I reduce my total income by £3100 to repay part of the loan or do I include it as an allowable expense?

There is a box for capital allowances in the self-employed pages of your tax return. See the short pages here (box 24) and the full pages here (box 49 or 50 depending on C02 emissions level).
Customer: replied 4 years ago.

I am aware of the capital allowances which I worked out to be £3046 based upon the CO2 and 90% business use so will claim that - what I wanted to know is can I reduce the total income of £16145 by the £3100 I re-paid myself in the current year. Sorry to be a pain and I will authorise paying you because you have been helpful. Or is the capital allowance the way that I get paid back for buying the car, which will probably take about 7 years.

As I said in my answer, you don't pay tax on your drawings from the bank account. You pay tax on the profit you make as adjusted by disallowable expenses and capital allowances.

Putting money back into your business account does not reduce your profit. Drawing money out does not increase your profit. Your profit is your business income less business expenses less capital allowances.

Customer: replied 4 years ago.

Sorry to be a pain and I do appreciate your time and I know I am probably being a bit dull but I don't think you have answered my question fully or maybe I am not asking it correctly, for which I apologise but I just want to be clear in my own mind. I put £10K into my self employed business so that I could buy a reliable car as I do a lot of mileage and I understand how I would show that together with repayments back to myself on a balance sheet. But how does it affect total income? Or am i right in thinking that the only way that I can gain any tax benefit from purchasing the car is via capital allowances and allowable expenses for fuel, insurance, tax and repairs etc. So when I put the £3100 which I repaid to myself on my tax return as an allowable expense was I wrong?.

The cost of the car is not an expense which goes into your income and expenditure account or your profit and loss account as it is also known. You are claiming a part of that cost as capital allowances which reduce your profit for tax purposes each year until you have written off the cost of the car.

You cannot loan money to yourself if you are self-employed. You are the business. So the payment of £3,100 you "repaid" yourself is not a business expense (it's a personal expense) and should be completely ignored for the purposes of your tax return and the calculation of your taxable profit.

As you said, the advantage you gain from buying the car is through capital allowances and the motoring expenses which you claim.

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Customer: replied 4 years ago.

Thank you for all your help and patience, I understand much better now although I think I might need to experience re-birth before I fully understand your world. Thanks again and goodbye

No problem. Thanks for accepting my answer.