If you are a sole trader, you have to keep business accounts just like any other business. According to popular belief, being a sole trader doesn’t mean working alone (though you might) or not having employees (though you might not). It is not uncommon for sole traders to employ dozens of staff and look like companies on the surface. For tax purposes, a sole trader is simply a description of the structure of your business, and thus the type of accounting you need to keep.
One of the most common terms for a sole proprietor is ‘self-employed’ (although that phrase can also be used to describe single-person companies). The following is a guide to accounting for a sole trader business.
As a sole trader, why is keeping accounts important?
It is your responsibility as a sole trader to figure out how much tax you owe each year. It will be much easier to manage your finances if you have a clear picture of your income and expenditure. You won’t have your taxes deducted monthly through a PAYE system, so keeping track of your accounts prevents you from accidentally overpaying HMRC come 31 January.
A self-employed person should have an understanding of how much he or she is spending and generating. If everything is laid out, you can identify opportunities to increase your profit margin, for example by changing your supplier or increasing the cost of some products or services.
As a sole trader, what accounts do I need to keep?
You must keep track of your income and expenditures, and keep them for five years after your 31st January tax submission date. If you’re asked for them by HMRC, make sure you have them prepared. You should keep the following records:
- Income from your business– This is the income that you receive through sales and services when you are a sole trader
- Income from other sources– Income you get from other sources, such as properties and investments, that may affect your tax liability
- Amount Spend – The amount you spend on the things you need to run your business efficiently
- Records of VAT –Businesses with annual turnovers over the VAT threshold must register for VAT and keep records for six years.
- Records of PAYE – As a sole trader, you can employ people without becoming a limited company, but you will have to keep a record of their wages through HMRC’s PAYE system
- Financial Assistance – Grants received from the government
As a sole proprietor, what taxes will I have to pay?
Taxes are paid by sole traders in the same way as by employees. HMRC requires you to calculate them and pay them yourself by the 31 January following the end of the tax year through the self-assessment tax return.
You must pay the following taxes as a sole trader:
- Your net profit is subject to income tax
- Contributions for classes 2 and 4 of National Insurance (these will be reformed to remove classes 2s)
- Valuation at source (if your turnover exceeds the threshold)
Is it possible to claim business expenses?
In the same way as corporations, sole traders are able to deduct business expenses from their tax bills. The government has established the types of expenses it will allow so people can’t claim money back for things they aren’t using for business purposes. Here are a few examples of self-employed expenses currently allowed:
- Inventories – products you sell or materials you need to make products
- Property, equipment, and office space – rentals, insurance, stationery, and software.
- Places of business– bills, insurance, rent.
- Costs associated with marketing and subscriptions– such as websites, advertising, trade memberships, and the like
- Transportation – including fuel, parking, insurance, and other transport costs related to business
- Uniforms – protective clothing, uniforms, and costumes for actors
- Business-related training –courses about your business, not on how to start one
- Costs of legal and financial assistance– lawyers, surveyors, accountants, but only for your business and not for legal assistance if you break the law
- Expenses for employees –employee salaries, national insurance contributions, pensions, training, benefits, and subcontractor salaries
It’s important to keep receipts of your business expenses since you’ll probably need them to prove your expenditures to HMRC.
Is it a good idea to open a separate business bank account?
A sole trader is treated as an individual and his/her business as a single entity for tax and legal purposes. If you’re a sole trader, it’s not a legal requirement to open a separate business bank account, but it’s a very good idea. Separating your business costs from your personal expenses can quickly become complicated if all your payments come from one account, making it difficult to keep track of them. Moreover, you may not want to disclose your personal account details to your customers.
Banks often charge for special business accounts, but they often offer helpful features such as billing, preparing tax returns, and managing payroll (if you employ staff).
How can I prepare my tax return with the help of an accountant?
A professional accountant can take care of your tax return, especially if you’re not particularly proficient at numbers or if you’re very busy. They’ll do the hard work for you – you only have to send them the records of your incomings and outgoings.
You’ll have peace of mind knowing that you won’t get in trouble with HMRC when you hire a professional to do your tax return. Keeping your invoices and receipts safe for proof should you need it is all you need to do. An accountant can be claimed as a business expense, and they will ensure that their services are included in your tax return.