If you work for yourself or start a business on your own and are operating without incorporating it as a limited company then you are referred to as a sole trader.
The term sole trader is interchangeable with being self employed.
Accounts
Each year, accounts for your business or trade would be prepared to record your income and allowable costs, which would usually be categorised by cost headings such as cost of sales, travel, stationery & printing, advertising & internet, use of home as office etc.
Tax year
A sole trader would generally prepare accounts by the Tax Year.
The Tax Year runs from 6th April to 5th April. Each tax year is given a label by the years it spans.
For example the tax year from 6th April 2019 to 5th April 2020 is referred to as 2019 / 2020.
Tax Return – Self Assessment
The tax return that you would complete as a sole trader is a self assessment and in particular the self employment supplementary page known as the SA103.
It’s worth noting that the self assessment is made up of the main section (the SA100) as well as several supplementary pages e.g. SA102 for employment, SA105 for property, SA104 for Partnerships.
Your accounts, which would be used to complete your self assessment, should show how you have arrived at your profits where:
Profit = Income less allowable costs
If your profits are below the amount equivalent to the VAT registration threshold then you can complete a short version of the self assessment supplement (an SA103S). Not only this but you can limit your financial entries to box 9 (your business income) and box 20 (total allowable costs); making the tax return very simple to complete.
Of course, for your own benefit, you may wish to analyse your income and costs by appropriate headings to help you monitor your business, assess your profitability and control your outgoings.
Personal Allowance
Each person usually receives a personal allowance, set by tax year. This is the amount that you can earn before you start to pay income tax.
The personal allowance for 2019 / 2020 is £12,500.
Even if your profits are below this amount or you’ve made a loss, HMRC will still expect you to complete a self assessment. In addition, you may need to pay National Insurance even if your earnings are below the personal allowance (see below).
Taxes paid by the self employed
Tax rates are set by tax year.
If you are self employed you will pay the following taxes:
Income tax
Income tax is paid on your profits.
The rates of income tax for 2019 / 2020 are:
| Band | Taxable income | Tax rate |
| Personal Allowance | Up to £12,500 | 0% |
| Basic rate | £12,501 to £50,000 | 20% |
| Higher rate | £50,001 to £150,000 | 40% |
| Additional rate | over £150,000 | 45% |
If you live in Scotland or Wales the tax rates and bands may be different.
To find out more visit the GOV.uk web site:
Click here for Scottish rates
Click here for Welsh rates
National Insurance
One of the reasons for registering as self employed is that you will need to start paying National Insurance in a different way than if you were employed.
As a self employed person two types of National Insurance contributions could apply; Class 2 and Class 4.
The rates for the tax year 2019 / 2020 are as follows:
Class 2
If your profits from your self employed business exceed £6,365 for the year you’ll pay Class 2 National Insurance at a rate of £3.00 per week.
This will be collected via your self assessment tax return and will be shown on your tax calculation.
Class 4
Class 4 National Insurance is paid if your self employed profits exceed £ 8,632 for the year.
The amount due is:
- 9% on profits between £8,632 and £50,000 plus
- 2% on profits over £50,000
Class 4 contributions are calculated on the self assessment and will also be shown in your tax calculation.
Benefits of being a sole trader
The advantage of operating as a sole trader is that the administration is by far the simplest of any business structure. The disadvantage is that you have unlimited liability meaning that if the business fails with debts then you are personally responsible for settling those debts which could put your personal assets at risk; although you may be able to minimise this risk by taking out appropriate insurance.
For those operating at higher profit levels, the taxes due as self employed can be more than if you operate your business as a limited company. So it is worthwhile regularly reviewing your business structure, your exposure to unlimited liability, your profit and the projected amount of tax that you will pay.
Register as Self employed
As soon as you start your business you need to register with HMRC for self assessment.
This must be done even if you already complete a self assessment tax return for other reasons.
HMRC explain how to register at:
https://www.gov.uk/log-in-file-self-assessment-tax-return/register-if-youre-self-employed
Key Dates
For the tax year 2019 / 2020 the key dates are:
- 31 October 2020 for submitting a paper self assessment return and to have the tax calculation done by HM Revenue & Customs
- 31 January 2021 for submitting an online self assessment return
- 31 January 2021 for payment of Income Tax, Class 2 and Class 4 National Insurance
- 31 January 2021 and 31 July 2021 for any payments on account due
Payments on Account
A payment on account is an amount paid towards the tax due in your current tax year.
Read more about payments on account at:
https://www.cheapaccounting.co.uk/blog/index.php/what-is-a-payment-on-account-poa/