Are you planning to start your own business, and are not sure whether to set up a company or go the self-employed route? This deliberation is very common, and many of us face this choice when venturing out on our own. If you do decide to become a sole trader, there are registration procedures and sole trader tax you need to be aware of. Here’s our guide of all you need to know about sole trader tax.
Sole traders, as defined by the HMRC, run their own business as an individual and count as self employed. As such they are required to send a Self Assessment tax return to the HMRC every year.
Should you set up a company or register as a sole trader?
The two most popular ways of setting up a business are to either set up a limited company or to become self employed. Each route has its advantages and disadvantages, and it is important to consider these thoroughly and choose your starting point wisely. One of the fundamental differences is how each of the two is taxed:
The company itself is taxed separately from its directors and shareholders. It is also subject to Corporation Tax on yearly profits, and managing partners must declare any withdrawal of funds from the company and submit them via self assessment.
A sole trader counts as self employed and is taxed via the Self Assessment tax system for each tax year. Sole trader tax includes paying Class 2 and Class 4 National Insurance (depending on your levels of income).
How do you register as self employed?
If you choose to set up your business as a sole trader, you need to register as self employed with the HMRC, which you can do here. This will provide you with a UTR number, which you might be required to provide for payment by other companies.
Filling out your first tax return
Once you have registered as self employed, you are required to fill out a Self Assessment tax return for each tax year running from 6th April to 5th April. The HMRC is encouraging the online completion of sole trader tax, rather than its hard copy version. This tax return is based on standard accounting practices, where expenses are deducted from earnings, which include any equipment, transport or amenities rented for your business. If your profits are equivalent of, or exceed, £5,965 a year you are liable for Class 2 tax and if your profits are equivalent of, or exceed, £8,060 a year you also need to pay Class 4 tax.
Updates on sole trader tax for 2016/17
The HMRC is going to shift self assessment from paper to online only. This will apply to any sole traders whose income exceeds a threshold, still to be announced. Part of this digital transformation is to be able for the taxpayers to have an online account with the HMRC, where they can log in and see all of the details of previous and future tax payments. According to one source, the Class 2 National Insurance contribution will be terminated.
Do you have to register for VAT?
The HMRC requires all sole traders and businesses to register for VAT once their turnover exceeds £83,000. You will be provided with a VAT number and a registration certificate. You can of course register before this level of income if you are trading with other companies charging VAT, to be able to claim it back. Once you do VAT register, you need to be aware of the following:
-you need to charge the correct amount of VAT on all of your products/services
-pay the correct VAT to the HMRC
-submit VAT returns
-keep all VAT records and have a VAT account
You can either register for VAT online directly with HMRC or you can use an accountant or agent to do so on your behalf. Certain exclusions apply to non UK businesses and exemptions, please check here.