Sole Trader Tax

The sole trader tax rules are the same as if you are an individual and pay income tax rather than corporation tax for example as a limited company.

Sole trading partnerships are the same, but not the same as limited liability partnerships. This guide provides the steps on how to prepare your self-assessment tax return to limit your tax liability.

Browse the guide below for all information on the subject, or use the list above to go straight to the relevant section.

Setting up Your Sole Trader Business for Tax Purposes

HMRC Registration

By the pure definition of being a sole trader, you'll first off need to register yourself as self-employed with the Inland Revenue or HMRC.

This step is a legal obligation, and if you don't register within three months of starting non-PAYE work, you will have a fine to pay, and it may signal you as a business they might investigate for tax affairs at a future date. You need to register as self-employed even if you still have a regular job and are paying tax under PAYE.

The HMRC now have a dedicated self-employment helpline if you have any queries so give them a call on 0300 200 3504 if you need advice.

VAT Registration

As you are a business, you'll also be required to register for VAT if you believe your sales or turnover are to exceed the minimums set out (currently £83,000 per year). This change means you'll need to charge VAT on all invoices but can claim back VAT on all purchases made for your business. The VAT rate is currently 20%.

Most businesses file a VAT return each quarter. You'll receive email reminders on when to complete the paperwork which is all undertaken online. You'll need to register for the service with the details you require located on the VAT website including new registration information.

Sole Trader National Insurance Rates

Even if you have a job where you pay National Insurance via Pay As You Earn (PAYE) where your employer deducts NI on a weekly or monthly basis, you'll also have to pay NI on your self-employment income.

You'll need to pay class 2 National Insurance contributions which amount to £2.40 per week - this ensures you are still able to access the national health service and puts a small contribution into your state pension pot if you pay no other NI.

Self Employed Tax

As a self-employed person, your tax is calculated in the same manner as if you are a person paying via PAYE except you will be able to deduct certain allowances against your income. Check out the types of allowable expenses you can deduct - if you are at all unsure then speak with an accountant who can provide the best and most up to date advice for you.

As with tax allowances, everyone starts with the standard single personal allowance, even if you are married. This value is the amount you can earn before you start paying tax and is currently £11,500 per year. All calculations are put together on your self-assessment tax return form which you need to submit to the tax office by January each year for the previous years accounts. In there you need to add in all income from any job or business.

Your Business Bank Account

If you are totally sure you want to be a sole trader (check out the advantages of being a sole trader here) then you need to keep your business and personal income and expenses separate.

Almost all banks will not allow you to deposit business income into your personal bank account. Even if you manage to, it makes preparing your self-assessment tax return a paper nightmare. Therefore, look at opening a business bank account as soon as possible. It won't cost you anything so you may as well go ahead and open your bank account when you decide to start your business.

Completing Your Self Assessment Tax Return

Everyone hates it, but the majority of the population have to complete one. HMRC will send you your tax return in the post each year giving you plenty of time to finish it. Unfortunately, most people leave it until the last minute, and the rules have changed on filing these forms.

You can send it back to the Inland Revenue in September by post, and after that, you need to file it online by the end of January the following year. And because most people leave it late the system for filing sometimes crashes, and you'll spend a lot of wasted hours entering your data.

Additionally, you'll need a unique password to access your records. The second part of your password gets sent by post, and you'll need this to log in. So even if you leave it to the last minute, you'll need at least seven working days to create a new account and log your records.

Tax Payments on Account

Paying your tax as a self-employed person is slightly different as you pay your tax liability "on account" twice a year in January and July with any tax due or refundable the following January.

The payment on your account is a value estimated from your previous year's return. You can get this amount reduced if you believe the current years profits or tax due is lower than expected by appealing to HMRC. Your accountant can do this for you. That's a summary of sole trader tax advice, just make sure you register in time if you are just starting your business.

Other Finance and Tax Issues

As a sole trader you should ensure you have the correct insurance cover such as self-employed health insurance to cover you if you are ill. To make the most of your savings ensure you have the correct business savings account to make your money go further.

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