What’s the best way to manage tax as a sole trader?

You will not be directly employed as a sole trader in the UK and will not be eligible for any wage or salary. Therefore, it can be slightly challenging to understand how you must pay the taxes as a sole trader.

As the sole trader, you will pay the Income Tax and National Insurance Contributions depending on your business’s profits. You can work as a sole trader. It is advisable to be familiar with the long-term goals and personal situations to choose accordingly.

What is a sole trader?

If you want to run your own business or become self-employed, you must decide the company structure. You can either start a limited company or become a sole trader. The sole trader needs to be familiar with the business model. The sole traders will be entirely responsible for any losses they make in the business.

Limited companies usually have a complex business model as compared to sole traders.

What are the taxes that sole traders pay?

Almost all limited companies in the UK will be eligible for corporation tax. However, the business that will function as the sole trader does not need to pay any corporation tax. The sole traders, on the other hand, need to pay income tax, and the income tax they pay entirely depends on the profit they make each year.

The sole traders must pay Class 2 and Class 4 National Insurance Contribution. You will be able to maintain all the reasonable expenses. The expenses may or may not be a part of the business. Some of the common expenses that you will be charged against the expenses include the following:

• Materials.
• Rent for premise.
• Utility bills.
• Marketing and Advertising.
• Phone or internet.

You need to pay the tax as a sole trader depending on your annual profits, and it is advisable to calculate the profit after deducting the expenses. Since you are a self-employed individual, you must know the basic details to get maximum impact.

How to manage tax as a sole trader?

When you have a sole trader business model, you must know how you manage your finances. As the sole trader, not only do you need to pay the taxes, but you also set an amount aside for yourself. The amount that you set aside for yourself is how much you pay.

How to pay myself as a sole trader?

When you start a sole trader business, you must have a business bank account. Therefore, when you start the business and want to pay yourself, you must set aside money. You must set up a separate business bank account as a sole trader business. This will help you in managing the business finances in a better way.

If you are paying yourself from the business bank account, you must keep a record of all the transactions. It is advisable to keep a note of all the incoming and outgoing. A good bookkeeping practice can come in pretty handy. Following the tips that can help you manage the accounts is advisable.

You will be eligible to pay taxes. Therefore, you should keep some amount aside to pay the taxes, and it should be accessible. Apart from the business bank account, you can also save money in a savings account.

How to pay the taxes?

Once you have paid yourself as the sole trader, you also need to spend some amount on the taxes. It would help if you started working on the Self Assessment annual tax return. It entirely depends on the profit on the income of your business. The expenses should, however, completely depend on your private business and not personal expenses.

The higher your profit, the more taxes you will need to pay. The tax liability will eventually improve. Setting aside an amount at the beginning is advisable to ensure that you cater to the National and Tax liabilities yearly.

Is the money related to the business?

When you are working as a sole trader, there will be no difference between you and the business legally. You will receive the income and pay the expenses accordingly. Therefore, the tax liability that you consider will also depend on your business.

Often it cannot be easy to manage businesses, especially in terms of operating income. Managing the time lag can often be tough, especially regarding receiving income and paying taxes, and you need to pay the taxes regularly for the business.

How is the sole trader taxed?

The HMRC runs a self-assessment scheme for the sole traders. The sole trader will have a personal allowance that will not be taxed yearly. The sole traders work for themselves and are responsible for managing and organising your taxes. Usually, the tax filing process is done online.

You need to register with HMRC as the sole trader. All the essential information regarding your assessment accounting code will be shared, and the Government Gateway usually sends the details. You will receive the Unique Tax Reference password and activation code as the sole trader.

You must submit the activation code when filing the self-assessment for the first time. If not online, it will come via post. You need to register yourself as a self-employed person. When it comes via post, the tax return should be filed within the deadline of January 31.

When will a sole trader pay tax?

The sole traders must pay tax only after receiving information from HMRC; the deadline is usually January 31. The sole traders will need to pay the tax only when their tax exceeds the personal tax allowance limit. You may receive notifications regarding the tax payment schemes.

Conclusion

The process of paying tax for a sole trader is simpler than that of a limited company. You need to follow the process of filing the Self Assessment. It would help if you used accounting software to track or record all the expenses. You might as well get in touch with expert accountants to keep a track record of all your expenses and pay the taxes accordingly.