There are many benefits to being a sole trader, such as flexibility, freedom and being your own boss. However, one downside is that you are responsible for managing your own taxes. This can be a daunting task, but luckily there are some steps you can take to make it easier. This guide contains all the basic details you need to know about managing your taxes as a sole trader.
Registering for Self-Assessment
The first step is to register as self-employed with HMRC. This can be done online, usually by the 5 October following the end of tax year during which you became self-employed. So say you started your business during the 2021-22 tax year, your deadline would be 5 October 2022.
When you register, you will be given a Unique Taxpayer Reference (UTR), which you will need to use when filing your tax return. HMRC only ever sends this by post - you can’t access it online.
When to Pay
As a sole trader, you don't have to make regular payments towards your tax bill like employees do. Instead, for your first year in business, you will need to pay your tax bill in one lump sum at the end of the tax year. This is known as 'self-assessment'.
Your tax bill will be based on your profits for the year, and you will need to file a self-assessment tax return by the 31st January following the end of the tax year. For example, if you start your business in April 2019, your first tax return will be due by 31st January 2021.
Payments On Account
After your first year of self-assessment, you will usually have to make two 'payments on account' towards your tax bill for the following year. These advance payments are due by the 31st January and 31st July. They are based on your previous year's tax bill.
Let's say your tax bill was £5000 in the 2019-2020 tax year. It was also your first year in business. On 31 January 2021, you would pay £5000 to HMRC.
Your first payment on account would be £2500, due by 31st January 2021. This means that you would pay £7,500 in a lump sum before 31 January 2021.
Your second payment on account would be £2500, due by 31st July 2021. These two payments would then be deducted from your tax bill for the 2020-2021 tax year, which would be due in full by 31st January 2022.
If you think that your tax bill for the upcoming year will be lower than the payments on account you have to make, you can contact HMRC to ask for a reduction.
If you don't pay your tax bill on time, you will be charged interest and may also have to pay a penalty.
This can sound daunting, but don't worry - you can always speak to an accountant for help with managing your taxes. They will be able to give you tailored advice based on your individual circumstances.
Managing Your Taxes
The best and simplest way to manage your taxes is to keep good records. This means keeping track of your income and expenses throughout the year, so that you can easily calculate your profits come tax time.
There are a few different ways to do this. Many sole traders use accounting software like QuickBooks or FreeAgent to keep track of their finances. This can be helpful as it gives you a clear overview of your finances and can automate some of the record-keeping process.
As a general rule of thumb, however, it's wise to set 30% of your income aside to cover your tax bill. This will ensure that you have the money available come tax time, and it will also help you to stay on top of your tax obligations throughout the year.
Conclusion
Managing your taxes as a sole trader can seem daunting, but it doesn't have to be. By keeping good records and setting aside money each month, you can make the process much simpler. If you have the right accountant by your side, they will be able to help you with all aspects of your tax return, from calculating your bill to filing your return on time.
Most importantly, don't be afraid to ask for help - it could save you a lot of time and money in the long run.
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