We’ll answer these questions-

  • What are the advantages and disadvantages of running a business as a sole trader?
  • How much tax do I need to pay as a sole trader?
  • What National Insurance Contributions do I have to pay?
  • Do I need to register for VAT?
  • What are payments on account?
  • What are the deadlines for submitting self-assessment tax returns?
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Setting up a business as a sole trader is the simplest, and thus, the most common business structure. According to the official statistics, almost 60% of business owners in the UK are registered as sole traders.

While sole traders are still entitled to employ staff, there is no obligation to register as a business with Companies House. However, you are legally obligated to register with HMRC and file a Self-Assessment Tax Return (SA100).

What are the advantages and disadvantages of running a business as a sole trader?

Advantages

  • Minimal set-up costs
  • Easy to set-up and close down
  • Only one tax return submission a year
  • Cheaper bookkeeping / accountancy costs
  • Less red tape – dealing with government departments

Disadvantages

  • Personally responsible for business debts
  • Can be less tax efficient (depending on profits)

How much tax do I pay as a sole trader?

For the 2019/20 tax year, sole traders will only have to pay tax on earnings that exceed £12,500.

The amount of tax you pay as a sole trader is calculated on your business profits.

  • An income from £12,501 to £50,000 is subject to the basic tax rate of 20%
  • Earnings between £50,001 and £150,000 are subject to the higher tax rate of 40%
  • Earnings over £150,000 are taxable at a 45%

You are also entitled to claim back business expenses that have been incurred wholly and exclusively for the purpose of the business including:

  • Business premises (rent, utilities, rates)
  • Business travel expenses
  • Office stationery and furnishings
  • Insurance
  • Pension
  • Professional subscriptions
  • Stock
  • Staffing and clothing costs (e.g. salary, uniform)
  • Advertising and marketing

For a detailed description of business allowances for sole proprietors visit the HMRC website.

What National Insurance Contributions do I have to pay?

Sole traders are eligible for flat-rate Class 2 and Class 4 National Insurance Contributions (NIC) depending on your income. NICs are calculated by HMRC when they appraise your self-assessment tax return.

Class 2 NICs are paid at £3.00 a week for profits above the small profits threshold of £6,365. No national insurance is payable if it is below this threshold. If your annual profits exceed £8,632, you also have to pay Class 4 NICs at 9% up to £50,000 and 2% on annual profits above this figure.

If you employ people, you are also obligated to collect income tax and NICs on their behalf and pay HMRC under the Pay As You Earn (PAYE) scheme.

Do I need to register for VAT?

You can voluntarily register for VAT at any time, however if your annual turnover is more than £85,000 it becomes compulsory and you must register your business for Value Added Tax (VAT). This means you will have to charge VAT at the relevant rate on all your invoices and that you can claim VAT paid on business costs.

The standard rate of VAT on most goods and services is 20%. Some goods and services such as home energy have reduced rates of 5% and food and clothes for children are zero rated at 0%.

What are payments on account?

Individuals that are registered as self-employed have to make ‘Payments on Account’ to HMRC. The payments cover the cost of your tax obligation together with Class 4 NICs.

Sole traders have to make two payments a year, before midnight on the 31st January and 31st July. The only exemption is if:

  • Tax payable on the previous year’s earnings is less than £1000
  • You’ve paid more than 80% of your tax liabilities already

Payment on account works on the assumption that you will pay a similar amount of tax in previous years. You can see how much your next payment is by logging on to your HMRC online account.

If your earnings are significantly lower than previous years, you can apply to HMRC and request a reduction.

What are the deadlines for submitting Self-Assessment tax returns?

HMRC have strict rules with regards self-assessment tax returns and failing to meet the rules can incur a penalty of at least £100.

HMRC issue fines for:

  • Online self-assessment forms that are submitted after 31st January
  • Paper self-assessment forms that are submitted after 31st October
  • Errors that are misleading or misrepresent your tax liability
  • Failure to inform HMRC about tax commitments that affect your tax liability

Paper self-assessment tax returns for the tax year 2018/19 must be submitted by 31st October 2019. Online submissions should be sent by 31st January 2020.

If you’re registered as a sole trader and need help with your self-assessment tax return, get in touch. Why run the risk of paying more taxes than you have to?