Nowadays, more and more people want to start their own businesses or become their own bosses.
Although the business model is not so complicated, they also face a series of problems such as taxation.
Three quarters of businesses in the UK are currently self-employed (not employing anyone other than the owner). This means that there is likely to be a lack of a professional accounting or tax team leading to a series of headaches and tax warnings.
This article will talk about a few things you need to know as a sole trader.
Register as a Sole Trader
First you need to register for a sole trader to pay your tax.
Sole trader is HMRC’s system for collecting income tax and can be done online very quickly.
After that, HMRC will send you an email containing a 10-digit Unique Taxpayer Reference (UTR) and set up your account.
The deadline to register with HMRC is 5 October after the end of your tax year as a sole trader.
There are severe penalties for registering too late to pay the self-employment tax or not paying it at all.
Employees
If you employ employees, you must collect Income Tax and National Insurance Contributions (NIC) from them and pay them to HMRC.
At the same time, you need to use the PAYE payroll scheme.
Underreporting or not reporting is also subject to tax checks.
Sole Trader Tax
You need to pay income tax on your business profits. Therefore, a sole trader tax return must be completed each year detailing your income and expenses.
In addition, a flat-rate Type 2 NIC (£3.15 per week) is required to be produced throughout the year.
If the annual profit exceeds £9,880, you will also need to pay a Class 4 NIC. For specific circumstances, you’d better consult a professional accountant to fill in the form.
Some Sole Traders are Required to Register for VAT
If your turnover exceeds the VAT threshold (£85,000 per annum), you need to register for VAT impacting customers to collect VAT and pay it to HMRC.
Please refer to our previous article for details: “Should the self-employed be registered for VAT?”
Key Tax Dates
Sole traders individuals pay taxes on January 31 after the end of the tax year.
HMRC requires payments to be made on 31 January and 31 July each year for the following year’s estimated tax.
Expect to pay 150% tax in your first year of business, and another 50% in July.
Extra Attention
You’ll need to keep detailed financial records, such as invoices, receipts, and utility bills for any inventory and supplies or other expenses.
Keeping basic financial records will help you when filling out your tax return.
You can also open a dedicated business bank account, which is a great way to separate personal from business.
Once you’ve opened an account, it’s a good idea to save some money each month to pay your taxes.
Finally, we fully understand that managing finances is a laborious thing, and leaving this huge hassle to our professional team can save you more money-making time.
