06/08/2024
When you become a sole trader, it's important to understand your responsibilities, particularly when it comes to tax and finances.
Here are six things you need to know when starting out as a sole trader:
#1 - You Need to Register as a Sole Trader:
You’ll need to go to the HMRC website and sign up as a sole trader so that they know you are running a business. They will then send you a letter with your 10-digit Unique Taxpayer Reference (UTR).
It’s best to register as soon as you become self-employed, however the latest deadline is the 5 October after the end of the financial year during which you became a sole trader.
For example, if you became a sole trader on 1 August 2023, the latest you would be able to register is 5 October 2024.
You can be severely penalised for failing to register as a sole trader, so this is not a skippable step!
#2 - You Need to Keep Accurate Financial Records:
As a sole trader, you need to keep detailed records of all of your sales and expenses. You won’t have to submit these when filing your tax return, but should you be investigated you will need to provide reliable proof of all of your activities - HMRC won’t just take your word for it.
Furthermore, it’s important to keep accurate records to ensure that you are paying the right amount of tax. If you fail to track all of your expenses, for example, then you may end up missing out on deductions and paying more tax than necessary.
Using cloud accounting software such as Xero is the best way to ensure that your financial records are accurate and up-to-date. Many software programs allow you to upload receipts on-the-go from your smartphone and can automate your invoicing for you to ensure that you know exactly how much money you’ve made.
#3 - You May Need to Register for VAT:
If you have a turnover of £90,000 or above (£85,000 prior to 1st April 24), you will need to register for VAT. This means you will have to charge your customers VAT on legible sales and then pay the VAT to HMRC. You will also be able to reclaim VAT that you pay on goods and services for your business.
Being VAT registered also requires you to sign up for Making Tax Digital for VAT. This means that you must use HMRC-approved accounting software to keep record of your VAT and submit your returns digitally.
#4 - You can Become a Limited Company:
If your business really takes off or the nature of your operations changes, then you may want to consider registering as a limited company instead. There are numerous benefits for this, including greater protection from risk and greater tax efficiency, depending on your expenses and turnover.
#5 - You Will Need to Pay Tax on Account:
Whilst employees pax tax as they earn via their employer, being self-employed means that you are responsible for your own taxation. After the end of each tax year on 5 April, you must complete a self assessment form before the following 31 January.
If you owe less than £1,000 in tax, then you will simply make a payment after completing your return.
However, if you owe more than this - as is often the case - then you will need to make two payments on account: 50% of your tax bill by midnight on 31 January, and another 50% by midnight on the following 31 July.
You will then need to make a balancing payment for the tax year by the following 31 January. This can be a difficult thing to budget for, so make sure you put enough money aside each month to cover your tax bill, particularly in your first year when this will hit the most.
#6 - Open a Separate Business Bank Account:
When you become a sole trader, you will need to open a separate business bank account. This makes it much easier to keep track of your business finances and ensures that you don’t mix up your personal and business expenses.
Most banks offer free business banking for a limited time when you open an account, so shop around to see who offers the best deal.
If you have any questions on becoming a sole trader please let us know!
