The HMRC minefield: The only navigation map you’ll need as a sole trader
Navigating your tax duties can be confusing, especially for those who are new to the system or who are transitioning to a new type of business ownership. That’s why we’ve put together this brief guide to help sole traders on their way to a perfect tax year.
First, the great news: being a sole trader entitles you to keep all of your profits after taxes. But, on the other hand, you’re also liable for all losses to your business. So you need to keep your taxes in order to make sure you don’t run into any hefty fines that will damage your bottom line and your reputation.
What taxes do you need to pay?
As a sole trader, you still need to pay income tax. For income in 2018/19 you can be taxed at the following levels:
- The Basic Income Tax rate of 20% on income up to £46,350
- The Higher Income Tax rate of 40% on income between £46,351 and £150,000
- The Additional Income Tax rate of 45% on income over £150,000
You will also need to pay National Insurance like any good citizen. HMRC will decide whether you are liable to pay Class 2 NICs, which is £2.95 per week, or Class 4 NICs which is 9% on earnings between £8,424 and £46,350, and 2% on profits higher than this.
Lastly, you need to pay VAT if you have a turnover of £85,000 or more, or if you registered for VAT voluntarily.
How do I pay my taxes?
When you’re on your own, you can sometimes feel like a ship adrift at sea. So don’t feel foolish for asking how you even pay your taxes. It’s as simple as this:
- Register as self-employed online – the days of paper tax returns are almost over.
- HMRC will send you a self-assessment tax notice.
- Submit your tax return by 31st January for online returns.
- Pay your tax. You should pay the amount you owe by January 31st. Therefore, it’s better to submit your tax return as early as possible, so you leave time to prepare the amount of tax you owe.
- Make payments on account. These are advance payments for the amount of tax you owe for the next tax year, calculated as half of the amount of tax you owed for the previous year. If it’s your first time completing a self-assessment, you need to know that you may have to pay a full year’s worth of tax as well as one instalment of your payments on account, so be sure to budget for this.
Just because you’re a sole trader doesn’t mean you have to go it alone all the time. We hope these tips have cleared things up for you and help make your business pursuits that much easier.
These are the basics of paying tax as a sole trader, but if you need more information get in touch with the professionals at Big Hand. Our experienced accountants know the best way to ensure you pay your fair share of tax while looking after your earnings. For more information, get in touch with us on 0161 327 2911.