Sole trader tax is paid by self employed individuals, human persons in the generally accepted meaning of the word,in the UK. this article is a brief exploration of the accountancy requirements and the tax regime for sole traders.
Once you set up in business as a sole trader and start buying and selling goods or services, you must start keeping records of all your transactions. These records will be used to prepare your accounts and tax return at the end of the relevant tax year.
You must also notify HMRC that you have started trading. HMRC require that you should register by
5 October in your business’s second tax year. If not, you may incur a failure to notify penalty.
Self employed people generally report their income in line with the standard tax year, that is 6th April to 5th April the following year, however, Sole traders, who have accounts prepared, can choose to prepare their accounts to a different year end date. There are rules which govern the use of accounts for sole traders.
The accounts for a sole trader are not governed by companies act, and are not submitted to companies house, however, the accounts would have a similar structure and follow UK generally accepted accountancy practice.
As a sole trader, for the relevant tax year you would get a set off account prepared which would have a profit and loss statement showing the sales for the year against your expenses in the year , a balance sheet showing the Assets and liabilities attributable to your business as at your year end.
Although there is no legal separation between your affairs and the business, accounts for a sole trader enable interested third parties such as HMRC , creditors and suppliers to reliably measure your trade income. So if you are a part time IT consultant, the bank can separate how much you make from IT consulting from your other income from say a day time job in manufacturing. In certain circumstances, third parties will demand that your accounts have an accountants certificate affixed.
From your accounts, and your other income,you would then have to complete self assessment every tax year. Your sole trader income would usually be classed as trade income. In addition to your trade income, you could also have rental income, dividend income, interest income on savings. All these are considered in determining your eventual Sole trader tax liability.
A common source of concern is the treatment of assets retained in the business. Really small assets such as cheap hand tools would be treated as expenses in the year, but an expensive laptop would be treated as an asset in your accounts. Happily, you get capital allowances against your taxable profit for qualifying assets like laptops.
To find out more about sole trader tax , or running a business as a sole trader, do please contact us.