As a sole trader, your tax affairs are a lot simpler than if you were running your business through a limited company – but you still need to make sure you file your forms, and pay the right amounts of tax, at the right times.
Here are four top tips to help you pay tax and save money when you are a sole trader.
1. Identify ways to reduce your tax bill
Nobody wants to pay too much tax. But too many sole traders miss costs out of their accounts, which means they don’t claim all the tax relief they can, and therefore they end up by paying too much tax.
If you work from home, whether that’s full-time or part-time, as a sole trader, then you may well be able to claim some of the running costs of your home as costs of your business, which will make your tax bill lower. Have a look at this video for more information.
Another way to bring your tax bill down is to claim the cost of using your own car for business travel.
There are two ways you can do this. If your business’s turnover is below the VAT threshold, currently £77,000 a year, then you can add up your business mileage, multiply that by HMRC’s approved rates, which are the same as mileage rates for employees, and include that cost in your accounts. This is a simpler method than the other option, but if your car is a gas-guzzler, then you might find you can claim more tax relief using the second method.
If your turnover is above £77,000 a year, then you need to keep a full mileage log, showing not only business mileage but private as well. Turn the business mileage into a percentage of the total, then work out how much you’ve spent on your car all together – fuel, MOT, repairs, insurance, and so forth – and multiply that by the business percentage use of the car.
2. Money you take out
When you’re a sole trader, you can take as much money out of your business’s bank account as you like and it doesn’t have any effect at all on your business’s tax bill. This is one area where your life is simpler than a company director’s, because they have to be careful how much they take out.
The reason why this is possible is because there’s no legal difference between you and the business when you’re a sole trader. Legally you are the business. So you can’t claim tax relief on money you take out of the business, or money that you spend on personal items from your bank account.
3. Remember tax return and payment deadlines
As a sole trader, you will pay income tax and one kind of National Insurance, called Class 4 National Insurance, on your business’s profits. You’ll also have to pay Class 2 National Insurance unless your profits are under a certain limit, which is £5,595 or less in the current tax year.
You must pay all these taxes each year by the 31st January following the end of the tax year (5th April), or you’ll risk incurring penalties from HMRC.
You must also file a self-assessment tax return (or tax return for short) by that same date each year, if you file the return online. If you want to file your return as a paper form then you only have till 31st October – 3 months less.
4. Look out for the payments on account pitfall
If your income tax and class 4 National Insurance amounts to more than £1,000 a year, then you’ll have to make payments on account. Briefly, what that means, is that on 31st January and 31st July each year, you have to pay half of what you think your next tax bill will be, based on the previous year.
This means that in your first year you can end up paying 1 ½ a year’s tax bill all at once! It’s a good idea to make a ball-park calculation in advance of what your tax bill might be, and save towards it.
As a sole trader you need to make sure you comply with HMRC’s rules, but you can still make sure that you don’t pay more than the right amount of tax! Ensure that you do your homework and know what your tax liabilities are as a sole trader well in advance of doing your tax return.
Today’s Micro Action
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