Running a business as a Sole trader is the most common type of business structure in the UK, in fact there were around 5 million sole traders in 2019. Unlike Limited Companies, sole proprietorship does not require any special registrations or fees, however, sole traders must ensure they register with HMRC as they are classified as “self-employed” and pay the tax on their income.
This is done by filing a Self-Assessment Tax Return to HMRC to declare any source of income on which no tax has been paid (Trading income, rental income, interest, dividends etc.). The deadline for filing a tax return is 31 January following the end of the tax year, e.g. for the tax year 2019/20 (6 April 2019 to 5 April 2020) this would be 31 January 2021. It is important to file a tax return before the deadline to avoid any late filing, late payment penalties and interest charges on any late payments.
Turnover of more than £1,000
Although most self-employed individuals are required to file a tax return every year, there is an exception for individuals who have not earned much throughout the tax year. If the turnover (gross income before deducting any business expenditure) for the tax year i.e 06 April to 5 April of the following year is less than £1,000 (also known as “trading allowance”), in which case, no tax submission is required, however the self employed individual or the business is required to notify HMRC by either phone or post, to ensure HMRC update their system and more importantly to avoid receiving any late filing penalties.
The exact penalties really depend on how late it was filed and the interest charges will depend on how much tax was meant to be paid by 31 January, a good estimation can be found by clicking here.
Taxation for Sole Traders
Employees in the UK who only receive employment income normally do not have to worry about paying taxes on their income (except for high employment income earners above £100k) as these are deducted automatically from the income every month, hence the name “Pay as you earn” (PAYE). However the transition from employment to self-employment can be somewhat confusing and complex to many tax payers as first of all unlike employees of a company, sole traders can deduct “business expenditure” from the gross income to arrive at a net profit which is then subject to income tax (e.g basic rate at 20%) and national insurance contributions (NIC).
|Company Employees||Sole Traders (Self-Employed)|
|Income Tax (20%, 40% or 45%)||Income Tax (20%, 40% or 45%)|
|Class 1 NIC||Class 2 NIC|
|Class 4 NIC|
|Automatically deducted via PAYE system||Paid via Self-Assessment Tax Return|
So, it’s the business net profits that determine how much tax needs to be paid to HMRC. If the business for example, makes a net profit of around £40,000, it will fall under basic rate tax threshold but much of the income will be subject to Class 4 NIC, which for 2019-20 is 9% for net profits between £8,632 and £50,000. Also, sole trader businesses have to ensure the claim genuine business-related expenses, these are as per HMRC guidelines “wholly and exclusively” for the purpose of running the business.
Sole trader record keeping
Sole traders need to ensure they register with HMRC and submit a Self-Assessment Tax Return every year after the tax year ends. Also, it is important to keep sound business documentation in case of HMRC request these for investigations or compliance check. Sole traders and businesses are required to keep business-related documents, invoices, receipts, bookkeeping records etc. for up to 6 years.
How we can help?
We have vast experience in helping sole traders such as chartered surveyors, electricians, CIS workers, constructions workers, plumbers, landscapers, black cap drivers, freelance models and actors, engineers, landscape gardeners, self-employed delivery drivers and many more. As authorised HMRC agents we can take the administrate burden of filing your tax return and we can provide with the following services:
- We can help you to register with HMRC and ensure you do not receive penalties for late notifications charges.
- Prepare full set of Sole Trader Accounts (if applicable)
- Prepare Self-Assessment Tax return accounts
- Produce SA302 Tax Calculation
- Advice on the required payments & payments on account
- Liaise with HMRC with regards to any tax or payment issues
- Notify you on any payments on accounts due