Okay when you are a sole trader you do not get paid a PAYE salary, so any money you take from the business are called "drawings" (I guess it comes from the word withdraw). It's all a little confusing and really it's only technical talk to say that money you take out of the business in this way hasn't had a net profit calculated and so tax has not been deducted from it yet (so Caroline a drawing is not a tax free little perk I'm afraid).
Any employed or self employed person has an annual personal allowance of £5035 for 06/07. Therefore any salary or net profit under this amount is not taxed - you take all of it home and the tax man gets nothing. Once you hit this limit in a single tax year then you have to start paying tax - gawd knows what the rate is now as that idiot Brown keeps mucking about with it, but for arguments sake we'll say it is 25p in the pound.
So, if your annual net profit before tax (or even PAYE) was £10,000, you would deduct your personal allowance of £5035 from this which is £4965. You would pay no tax on that £5035 BUT you would then pay 25p of every pound of that £4965 to Mr Brown!!! 4965 x .25 = £1241.25 is the amount of tax you would pay, leaving you with a net profit AFTER tax of £8758.75. (that's £10,000 minus £1241.25)
I hope you understood all that. Now how do we get to your actual profit before tax?
When you are self employed you have to keep a note of all your incomings and outgoings. Income is obviously any money you take from your clients. Outgoings is really anything you use solely for your business, such as stock, stationery, advertising etc and you can claim this amount 100%.
BUT then you can have items that you may use only partially for the business. Maybe your mobile phone you use for both personal and business use. You then have to be able to show on your phone invoice the proportion you use for personal and business use. The amount for business use is what you offset from your tax.
There are also complicated things like Capital Allowances. This is for items of equipment, such as your nail desks, chairs, couches, UV lamps, microcurrent or other electrical machines, till, etc. Basically items that hold their value over time and that you could sell if you went bust for example! Whilst this is a business expense the Inland Revenue says you cannot write it off against tax in one financial year. You have a write down allowance, or capital allowance is what the IR call it. I'm not sure what it is for 06/07, but usually the first year is quite a large amount, about 45%. Therefore, if you have a couch that you bought for £100 you CANNOT claim this whole invoice against your tax for that year, you can only claim that 45% . But we are getting mega complicated here and it will blow your mind if i carry on.
So basically to get back to your question, you can't claim tax back, it just means you don't pay it if your net profit (ie your income less your outgoings) is below that amount of £5035.
Boy I hope that made sense! I would get booked on an IR course as they are fab and it really goes into this in depth in a very easy to understand way, far better than I can explain that 's for sure!!!!!!!!!
Also remember if you make a loss then you can carry forward that loss to the next year which means it can help reduce your tax bill for next year!
