As a sole trader, managing your accounts is one of the key tasks you have to deal with. But because you are self-employed and looking after so many aspects of the business yourself, it can be easy to let the accounts slide as other tasks frequently take priority.
This article offers advice on what you need to do manage your accounts. It covers what’s required to set up as a sole trader, taxes you’ll need to be aware of, what you need to do to register for VAT (if necessary) and how to stay on top of your finances.
Manage your accounts as a sole trader: First steps
Firstly, you’ll need to register with HM Revenue and Customs (HMRC) and make sure you understand its rules on running and naming your business.
As a sole trader, you are responsible for the business. You will be classed as self-employed, although you can still take on staff.
As a sole trader, you must:
You will need to keep a record of all your invoices and receipts for six years. HMRC carries out random checks on businesses to check they are compliant with tax regulations, so you’ll need to hang on to all the paperwork and make sure it is accurate and up to date.
Anything that is a business cost can help reduce your tax bill at the end of the year. This will include:
- computers equipment and internet access
- phone bills
- travel to customer premises
- motor expenses
It pays to get into good habits from the beginning when it comes to keeping track of receipts. If you regularly get the train to go and see your clients, always keep the tickets in a separate part of your bag, or buy them online before you go so you have an email record.
When you buy a coffee, always request the VAT receipt – some cafes don’t issue a receipt by default.
Keeping the tax man happy
As a sole trader, there are several taxes you will have to pay to HMRC:
Income tax and self-assessment tax return
As a sole trader, you must report your business profits at the end of each tax year, in April.
Your accountant (if you have one) will need a full set of your accounts showing income and expenditure, from which they can work out your tax liability. You will need to pay your tax on this income by the following 31 January.
It makes sense to complete this process much sooner – don’t put it off until the night before the deadline.
Once you are in the system and have paid your first return, you will need to pay tax twice a year, on 31 January and 31 July. This is known as payments on account. Each payment is equal to half the amount of tax you owe for the previous tax year.
Top tip: It’s good practice to put aside 30% of everything you earn. Consider setting up a separate bank account for this so you know the money is there to pay for tax, National Insurance and VAT when you need it.
Taking care of tax if you’re self-employed
Getting your taxes right is vital. Read this guide for support with Self Assessment, and learn how Making Tax Digital will change how you manage your tax returns from April 2024.
When you set up as a sole trader, you will need to let HMRC know within three months.
You will need to pay your quarterly Class 2 National Insurance bill, which is a basic payment that goes towards your state pension in the future. Any extra Class 4 National Insurance payments will be calculated by your accountant at the end of your tax year.
Top tip: Sometimes self-employed people have a mix of permanent employment and freelance work on the go. For example, someone who works in a bank during the week but writes children’s books in the evening or has a side business making jewellery. Just make sure you are not doubling up on your National Insurance contributions.
Registering for VAT
As a sole trader, you will need to register for VAT if your turnover is more than the current threshold, which is £85,000. You can register voluntarily even if you are below the threshold, and some sole traders decide to do this because it implies you are a more established, trustworthy business.
You will be able to claim the VAT back on everything you buy for the business, which will be advantageous if the nature of your business is buying stock and selling it on – for example someone who makes crafts for the home or a plumber who is frequently fitting parts in appliances.
If you charge for your time, like a designer or business coach, then registering for VAT voluntarily won’t bring you so many financial advantages.
In the Flat Rate scheme, you charge your customers at the standard rate of VAT and pay the money back to HMRC at a lower rate, depending on the nature of your business.
Top tip: Make sure you pick the right category – there are lots to choose from and some of them sound similar but have different rates. Do double check with your accountant to make sure everything is in order from day one.
Take responsibility for any business debts
When you start out as a sole trader, it’s a good idea to set up a separate business account so your personal and company finances are kept apart. It’s one of those jobs you’ll thank yourself for later as your business grows and there are more and more transactions happening relating to the business.
You could also consider requesting deposits and staggered payments on larger jobs, rather than waiting for the project to be completed in full before you send your bill.
How online accounting software can help you
If you are entering all your transactions into online accounting software throughout the year, you will be keeping accurate records as you go.
Using online accounting software as a sole trader also means you can cut down on paper, saving you money and space – the latter may be in short supply in your home office or workshop.
And because each time you add a new supplier to the system you’ll be making note of their full contact details, you don’t have to worry about keeping an address book up to date.
Better chance of getting paid on time
It is good practice to keep on top of your accounts. Depending on the size and complexity of your business, this could be monthly or weekly. By finding time to do it regularly you can quickly clear up any queries… what was that receipt for again?
Or you can spot someone who hasn’t paid their invoice on time and gently suggest that you can’t do anymore work until you’re all square.
You can create also quotes and invoices, customised with your branding and full contact details, which can be emailed to customers in PDF format. This speeds up the whole process of getting the work – and getting paid for it.
Submit VAT returns to HMRC
What counts here is speed and accuracy. With accounting software, you can run off your VAT return in minutes, check the figures and submit it to HMRC.
If you set up a direct debit, the money will be deducted on the 10th of the month following your VAT quarter, meaning no missed deadlines and no penalties – good news for the sole trader keeping a close eye on their bank balance.
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