Accountant For Self Employed
Tax and accounting for sole traders
You have taken the plunge and decided to work for yourself. You’ve started your sole trader business and are now self-employed. Now it might be time to consider the factors when it comes to accounting for self employed people.
Every self employed business is required to keep records which record the business’ income and expenses. These records are used to calculate the profits which will be included in your Self Assessment tax return. As a newly self employed business it can often seem difficult to know where to start in dealing with record keeping, tax obligations and accounts.
To make things easier for sole traders we have put together this guide to make sure you not only deal with all your tax obligations but get your new business off to a flying start.
1. Open a separate bank account
In a sole trader business, the owner is not legally separate from their business. There is no legal requirement for a sole trader to operate a separate business bank account but it is definitely better. Keeping you personal transactions in a personal bank account and your business transactions in a business bank account makes it easy to record your business expenses and income. This makes it much easier for you to know how your business is performing and will make it much easier to deal with your record keeping.
2. Choose an accounting system
This can feel a little daunting but the sooner you start keeping your business records the better. There is nothing worse than getting to the end of the year and having nothing but bank statements and a bag of receipts. Preparing accounts for your tax return will be time consuming and will only serve the purposes of calculating your tax. A good accounting system will provide information on how your business is performing and will help you run you business better.
Cloud accounting software such as Xero or Quickbooks Online provide easy to use software designed to help business owners efficiently deal with their bookkeeping and accounting. Both have affordable options for sole traders and provide the tools to create fully digital records. These include bank feeds which make recording bank transactions quick and simple, sales invoice creation and scanning of purchase invoices and receipts.
3. Don't forget about tax and National insurance
Each year a sole trader business calculate’s their profits for that year. These are included on your Self Assessment tax return and tax and National insurance is calculated on these profits. It is easy to forget about this in the challenges of running a sole trader business. Cloud accounting records help you see how profits are building through the year and give an indication of how the tax is also building. Opening a business savings account is one way to keep back money ready to pay tax.
In the current tax year 2021/22 and individual can earn £12,570 before they start to pay tax, this is your Personal Allowance.
For income above the Personal Allowance, you will be taxed at the following levels:
- The Basic Income Tax rate of 20% on any income up to £50,270
- The Higher Income Tax rate of 40% on any income between £50,271 and £150,000
- The Additional Income Tax rate of 45% on any income over £150,000.
Sole traders also required to pay National Insurance. They pay Class 2 and Class 4 NICs.
You will be required to pay Class 2 NICs of £3.05 a week (2021/22), if your profits are £6,515 or more a year.
You will pay Class 4 if profits are £9,568 or more a year (9% on profits between £9,568 and £50,270 and 2% on profits over £50,270).
You will need to tell HMRC that you are self employed and register for Self Assessment. This can be done online via HMRC’s website.
You must do this by 5 October in the tax year following the tax year you started your business in or you may be fined. For example, you started trading on the 1 June 2020 which is in 2020/21 tax year. You must register as Self-employed by 5 October 2021 and will be required to submit a Self Assessment tax return for 2020/21 by 31 January 2022.
4. Claim business expenses
When working out your profits there are a number of business expenses which are allowable for tax and some which are not.
Expenses which are allowable and can be claimed against sales income when calculating taxable profits include:
- Cost of stock
- Delivery charges
- Heating and lighting in your business premises
- Rent of your business premises
- Relevant books and magazines
- Bank charges
- Telephone use
- Bank charges on business accounts
Expenses you may not claim include:
- Parking fines
- Speeding tickets
- Childcare or school fees
- Client entertainment
- Gym membership
- Clothing – unless branded or required for safety purposes
- Training courses that are not related to your job
If you are a sole trader who works from home then you can claim a proportion of your household bills. This can be calculated as a proportion of certain household bills or you can use Simplified expenses.
5. Complete your Self Assessment Tax Return
All sole traders will have to complete an annual Self Assessment Tax Return and submit this too HMRC. The Self Assessment provides HMRC with information on your income and expenses, and makes sure you are taxed the correct amount.
Completing your Self Assessment tax return is easier if you have good business records. HMRC provide guidance on how to complete your tax return and you can be do it yourself via your Government gateway Personal tax account.
Sole traders often chose to use an accountant to prepare their accounts and complete their Self Assessment tax return on their behalf. An accountant will make sure that all legitimate expenses are included when calculating profits and ensure that other appropriate allowances and reliefs are included, such as capital allowances on plant and equipment.
Preparing your Self Assessment tax return as soon as possible after 5 April is especially helpful if you are going to be subject to payments on account.
These are advance payments of Income tax and Class 4 NICs that may be payable for the future tax year.
These become payable if your Income tax and Class 4 NIC’s due on your tax return total more than £1000 and are payable on 31 January and 31 July.
6. Register for VAT if necessary
You must register for VAT if:
- Your turnover is more than £85,000 in a 12 month period
- You expect to go over the threshold in a single 30 day period.
You can chose to register for VAT if your turnover is below £85,000. This could be for several reasons including where you deal with predominately VAT registered businesses as customers.
When you are VAT registered you must charge VAT to your customers at the appropriate rate for your sales and you recover the VAT you have paid on the purchases for the business. You are required to submit VAT returns to HMRC and pay the VAT due (the difference between VAT charged to customers and VAT recovered on purchases).
Being VAT registered will also allow you to recover any VAT you pay on purchases for the business. If you’re registered for VAT you must keep all information for 6 years.
The turnover threshold of £85,000 in a 12 month period relates to a rolling 12 months, not the turnover in your accounts.