We all know that businesses need to pay tax, but how many sole traders and small businesses are actually properly advised on what they should be paying, both as businessentities and as tax-paying individuals? If you’re operating as a sole trader or partnership you are eligible to pay Income Tax and National Insurance, some businesses will be required to charge VAT on their sales too – how much you actually pay is a whole other ball game!!
Sole traders must complete a Self-Employment tax return at the end of each tax year. The return allows you to provide details of your business’ income and expenses. This information is used to work out how much Income Tax and National Insurance Contributions you have to pay. Here are the basics:
– Self-employment/self-assessment return
If your annual turnover from self-employment is below the VAT registration threshold, you can use a ‘three line account’, which gives HMRC condensed information about your business’ income and expenses. All you need to provide on the relevant pages of your tax return are:
– Details of your turnover
The total allowable business expenses, rather than a breakdown of each expense
Net profit or loss
Details of any adjustments, allowances or losses
If you prefer, you can still give a fuller breakdown of all your expenses in the relevant boxes on your tax return. Businesses below the VAT registration threshold can also use cash accounting so turnover and expenses will be cash received and payments made in the period.
– Tax and NIC liability
After deducting the personal allowance, profits from self-employment are taxed firstly at the basic rate of Income Tax. If the taxable income exceeds a specific amount (£31,786 ) the excess will attract Income Tax at 40% or even 45%.
There are two classes of National Insurance Contributions (NIC) for the self-employed. The first, Class 2 starts at profits of £5,965 and is £2.80 per week. Class 4 NIC starts at profits of £8,060 and is payable at 9% up to profits of £42, 385 when Class 4 drops to 2%.
– Payment of Tax
Self-assessment payments are due by 31 January and 31 July each year. For the business profits in any tax year the first payment on account is due by January 31, the second payment is due by July 31, and any balance must be paid by the following January 31. Failure to make these deadlines will result in interest being charged.
If you feel that you are out of your depth making these returns on your own, then don’t delay in contacting us, we are here to make sure you get on with what you do best, while we take care of the boring stuff. We will make sure your money is working for you by assessing your tax efficiency and making your income work smarter for you.
