As a sole trader, one topic that should always be at the forefront of your finances is your tax returns. In a future blog [we will look at some of the important dates in the calendar if you’re a sole trader. But today, we are going to look in lot more detail at self-assessments and what exactly is included in them so that if you are a sole trader; you are fully informed of what’s demanded and required of you.
Firstly, you need to get yourself registered for self-assessment if you haven’t already. This is a way of letting HMRC know that you are self-employed. And you can do this by visiting here. Once you have been set up, you will be given your UTR or unique taxpayer reference. It’s important to know this and retain this information as you will need this for all of your correspondence going forward.
Understanding your tax brackets
When we mention tax brackets, this is the amount of money that someone can earn without paying any tax on it. This is also more commonly known as a ‘personal allowance’. As of the year 2022/2023 this was set at £12,570. So if you earn below this you will not be taxed. Likewise, if you earn above this you will start to pay tax. And this is where the tax brackets start.
Anything above £12,570 and you will pay 20% in tax up to when you earn £50,270. After that, you will then start to pay 40% tax on anything on that and then up to £150,000. These rates are subject to change each and every year; but as at the time of writing this article, they remain the same. You can be sure though that any changes to any of these we will ensure that we are the first to let you know.
Recording your expenses
As a sole trader, one of the benefits you get is being able to claim expenses. If you accurately record allowable expenses throughout the year, by the time it comes to your self-assessment and filing your tax returns, this can save you a significant amount when paying your taxes annually. There are many different taxable allowances we will go into a lot more on in another blog, but these include and are not limited to stationery, petrol, travel, printing, and much more.
To give you an insight into just how much can be saved, we will use a typical example; let’s say in the last year, as a sole trader, I turned over £30,000. You then need to take the personal allowance off which leaves it at £17,430. Which, at the moment, is the profit that you will pay tax on. However, let’s just say you have £7,430 in allowable expenses, this reduces it to £10,000 profit to pay tax on. This means that you will be paying 20% of that which will be £2,000. Whereas before you would have been paying £3,500. So just by claiming your expenses alone, you have saved £1,500.
Payments on account
We also covered this briefly in our blog about important calendar dates for the self-employed; but we will go into it in a little bit more detail so we can guarantee it makes sense. When you have finally paid off your first year’s worth of tax returns, you’ll then have to find half of it by the following 31st of January and then another half by July. Essentially, you are making payments in advance.
So you’re probably wondering, “why do I have to pay in advance?” Well, essentially, it’s the government’s method of ensuring that you keep paying tax, and it’s also an accurate forecast of what you’re most likely to owe as it is based off the tax that you had paid in the previous year; and so if your business has experienced an exemplary year of growth it won’t be based off that year’s figures but rather the previous years.
The only downside to the way this works is that if you’ve experienced a year with a much higher turnover and respective profit. This is because you will be paying a lot more tax based on that previous year’s profits; but if you have suffered a year with a much lower turnover; this may make it a struggle for you to be able to make these payments without it hindering the rest of your business.
We are here if you need help
Being self-employed can sometimes seem like there are not enough hours in the day to get stuff done. However, that’s why you should look to outsource some of your work so that you can focus on what really matters. When it comes to filing your tax returns; this can be made easier by accurately recording your expenses and also having a good hold on your bookkeeping. And is that where we can help you and your business.
Here at D&K Accounting, we specialise in helping alleviate the burden of bookkeeping so that you can focus on the areas of your business that matter. We can also help in making sure that you are on top of your finances. And that your tax returns are done when they need to be each year without any problems or bumps in the road. If you want to know more about how we can help you, get in touch today.