If you decide to start a start-up business while employed, you may be entitled to a tax refund if you make a loss. Many businesses make a loss in the first year, so employment can help to fund your business while you grow it and also to sustain yourself. HMRC allows self-employed people to offset their losses against any tax paid, which may result in a refund. This is open to all self employed people, not just those in their first year.
Take Mrs X. She’s currently employed as a consultant on £40,000 per year, and her employer deducted £6,505 of tax over the year. In her spare time, she began to work on her start up with the aim of growing her company into a full time career. In the year to 5 April 2012, although she made sales of £8,000, her start-up business costs amounted to £20,000 creating a loss of £12,000. A simple ‘tax computation’ would be as follows;
Employment income: £40,000, tax paid £6,505
Less: Sole trade loss: (£12,000)
Net income: £28,000
Less; Personal tax allowance (£7,475)
Taxable income £20,525
Tax due on £20,525: £4,105
Tax paid (as above): £6,505
Refund due to Mrs X: £2,400.00
At 5 April 2012, the personal tax rate was 20%, therefore this percentage was due on her £12,000 loss, which is £2,400. This is only possible because Mrs X had employment income in the year which had tax deducted on it, and made a self employed loss. You can’t offset Limited Company losses against your employment income.
If you’re thinking about starting a start-up business, or have taken the dip already and want some advice, why not drop us an email to arrange a free, informal meeting to discuss your concerns and how we can help.
No responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this blog post can be accepted by us.
Tagged
Personal Tax , Sole Trader
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