Your business setup affects the taxes you owe and the reports you need to file. If you’re running the show by yourself without forming a company, you’re a sole trader. On the other hand, if you run your business through a personal company, even if you’re the only employee and director, the company is its own legal entity.
If you’re thinking about starting your own business as a sole trader, here are some key points to consider:
1. Registration to Self-Assessment
– New to Self-Assessment: If you earn more than £1,000 in a tax year and haven’t registered for Self-Assessment yet, you need to sign up by October 5th following the end of that tax year. You can register online at the Gov.uk website.
-Existing Self-Assessment Registrants: If you’re already registered for Self-Assessment, you still need to register as a sole trader to account for Class 4 NICs. Even if your profits are low, you can opt to pay voluntary Class 2 NICs by registering.
2. Earnings of £1,000 or Less:
– If your gross trading income is £1,000 or less, you can use the trading allowance to make your profits tax-free without informing HMRC.
– If you earn more than £1,000, you can either deduct the £1,000 allowance or your actual expenses, whichever is more beneficial. If you incur a loss, registering and filing a tax return is recommended to claim relief.
3. Record-Keeping:
– Keep track of your business income and expenses. Guidance on necessary records is available at www.gov.uk/self-employed-records.
4. Income Tax and National Insurance:
– As a sole trader, you’ll pay income tax and Class 4 National Insurance contributions (NICs) on your profits.
– Class 2 NICs were required before the 2023/24 tax year.
– Sole traders pay income tax on their profits. Starting from the 2024/25 tax year, your taxable profits will align with the tax year (April 6 to April 5).
– Your tax liability is based on your total income, including self-employment profits. File your tax return by January 31 after the tax year ends.
– Class 4 NICs apply to profits over £12,570, with rates of 6% on profits between £12,570 and £50,270, and 2% on profits above £50,270.
– Pay your tax and Class 4 NICs by January 31 after the tax year ends. If your total liability exceeds £1,000, make payments on account for the next tax year on January 31 and July 31, unless 80% of your tax is collected at source through PAYE. Each payment is 50% of the previous year’s liability.
5. VAT Registration:
– You must register for VAT if your taxable turnover reaches the threshold of £90,000.
