Introduction to Sole Trader Tax
Sole trader tax is a levy paid by an individual on the business profits of the company. Sole trader tax rules are the same as an individual paying income tax. Sole trading partnerships are also same but different from limited liability partnerships. Some of the features of sole trader are given below-
- A sole trader pay tax on business profits (Minus expenses)
- Any monetary gain will be taxed if sole trader sells assets of the business.
- Tax relief is provided to the sole traders on the business expenses incurred
- He can withdraw cash from the business any time without tax effect.
- A sole trader can claim tax relief on interest & charges if he is having a business bank account separate from its personal account.
Getting started as a Sole Trader Business for Tax Purposes
If you are setting up as a sole trader, you must register yourself with HMRC for tax purposes, especially VAT.
Firstly, you must register yourself as a self-employed person with HMRC department within 3 months of starting the business. If you will not register yourself within 3 months, you will pay a fine and could be subject to HMRC investigating your tax affairs in the future. You must register as a self-employed person even if you are doing a regular job and paying tax under PAYE.
If you have any query or need any advice, you can contact the HMRC self-employment helpline number 300200504.
If your sales turnover is exceeding the minimum set out limit of £83, 000 per year, you must apply for VAT registration. This will mean you need to charge VAT on all invoices and you can claim back VAT on all purchases made by your business.
Most businesses file a VAT return every 3 months. And VAT is currently charged at 20%. You can visit the official HMRC website to know more about VAT registration.
Sole Trader National Insurance Rates
If you are doing a job and paying national insurance through PAYE on a weekly or monthly basis, you must pay national insurance separately on your self-employment income.
You will pay class 2 national insurance contributions amounting £2.40 per week. This means that you are still able to access the National Health Service while putting a small contribution into the state pension if you pay no other national insurance.
Self-employed tax is calculated in the same manner as an individual paying tax through PAYE but you can avail the allowances to be deducted against your income.
Types of allowable expenses deducted
- Standard single personal allowance
- Mileage expenses
- Travel expenses
- Meal expenses
Every person starts with standard single personal allowance even if you are married. The amount value is £11, 500 per year. All calculations are collected together on the self-assessment tax return form which needs to be submitted to the tax office by January each year, for return of the previous tax year. While submitting your tax return, you must add all incomes arising from any job or business.
Business Bank Account
If you want to be a sole trader, you must differentiate your business income, personal income as well as the expenses. Banks do not allow any sole trader to deposit business income into his or her personal account. If you manage to make the deposit, it would be very difficult for you to prepare your self-assessment tax return. Therefore, your best option is to open a business bank account. It is free of charge. Whenever you decide to start your own business, you must open a business bank account.
Completing your Self Assessment Tax Return
Most people hate filing self-assessment tax returns but everyone must complete it before the deadline issued by HMRC. You are given plenty of time to file your tax returns but traditionally, most people leave it until the last minute due to confusion or lack of information. It is not uncommon for the filing system to crash due to high number of submission of tax returns on the very last date and you can waste a lot of time entering your data again and again.
You can file your tax returns by paper or online. For paper returns, the deadline is 31st October whereas for online return, the deadline is 31st January.
You need a unique password to access your records. The second part of your password will be sent to you by post for security reasons. Therefore, if you leave it until the last minute, you will need at least 7 working days to create a new account and enter your records.
How Nomisma Accounting Software can help sole traders
Nomisma offers sole traders the best accounting software that enables you to file tax returns directly to HMRC. Ahead of the Making Tax Digital for VAT changes that are incoming next April, accounting software has been forced to change. Nomisma will be fully compliant with HMRC’s changes to filing tax returns and can help your business by:
- Managing your accepted and rejected submissions by HMRC
- Covering your finance needs from bank interest and capital gains to dividend income and pension contributions
- Saving you time as it’s fully integrated with bookkeeping module
- Storing all documentation in one place
- Generating reports and calculating your returns.