This is the simplest way of trading. There are only a few formalities to trading this way, the most important of which is informing HMRC as penalties will be charged if they are not notified by 31 January following the end of the tax year in which you started the business. To register you can either telephone the Revenue on 0300 200 3300 or complete form CWF1.
Tax and National Insurance
Sole traders are self-employed and must complete a self assessment tax return every year. Unlike being an employee, you won’t be taxed on your income. Instead you will be allowed to deduct business expenses and pay tax and Class 4 National Insurance on the profit you have made. The rate of tax you pay is the same as an employee however Class 4 National Insurance is set at a lower percentage than the National Insurance you pay as an employee. The government sets the rates each year - usually during the annual budget. See our Rates and Allowances section for the current rates.
Self employed people are also liable to pay Class 2 National Insurance contributions which is a set weekly amount. This is due from the date you commence being self employed and is usually collected by monthly direct debit although you can also elect to pay by quarterly bill.
You are required to keep business records in order to calculate profits each year. For further details about what records you are required to keep please see our guide to record keeping. Any profits generated are automatically yours and the business is not distinguished from your personal affairs so that if there are any tax debts, you are legally liable to pay these – even if this means selling personal assets.
Accounts are required in order to complete your Self Assessment Tax Return. A tax year runs from 6th April to the following 5th April however you do not have to prepare accounts just to these dates. In fact by carefully selecting the date you prepare your accounts to, you can not only achieve significant cashflow savings during the early years of a growing business but also increase the length of time you know about forthcoming tax liabilities. The rules surrounding your choice of accounting date are quite complex so please contact us to discuss how they impact on your individual circumstances.
The only deadlines a sole trader needs to be aware of are the due dates for filing a Self Assessment Return and for paying any tax. There are two options for filing Returns:
- Complete a manual paper Return - must be submitted by 31st October following the end of a tax year.
- File a Return online - must be filed by 31st January following the end of a tax year.
Tax and Class 4 National Insurance is collected at the same time. The first payment will be due on 31st January following the end of the tax year in which you started your business. For example, if you commenced on 1st June 2013, your first payment of tax will become due on 31 January 2015. This may seem a long way off and you may be tempted to delay saving for your tax bill however, it is important to put some funds aside from day one as on 31st January 2015 you will also probably be required to make a 'payment on account' of your following years tax liability. This amount is based on one half of your previous years liability. A second 'payment on account' will become due on 31st July. For example, say your tax bill for your first trading period is £3,000, the amounts you will have to pay will be:
January - £4,500
31st July - £1,500
Tax due dates will then be 31st January and 31st July each year. It is important to file your Return and pay your tax on time as penalties will be charged for any late Returns or payments