The taxation of sole traders — a quick guideline for the self-employed

In this tutorial, we'll look at the taxes you'll face if you establish your own business as a sole trader, as well as other considerations to keep in mind before going it alone.

One of the first decisions you must make when starting a business is the business structure to use.

Setting up your own limited company or working as a lone trader are the two most popular possibilities. It's a big decision that's influenced by your personal position as well as your company's long-term goals.

Enterprises that are sole traders and businesses that are limited companies are taxed differently.

The way each form of business structure is assessed for tax reasons is one of the most fundamental variations between them.

A limited company is taxed separately from its owners and directors, whereas sole traders (and partners in partnerships) are taxed as a single entity.

A Limited company must pay Corporation Tax on their annual profits, and directors must file an annual self-assessment return to report any income received from the company.

Every year, all self-employed people (sole traders and partners in partnerships) use the self-assessment system to pay income tax and National Insurance Contributions on their business profits after deducting expenses.

Registering as a self-employed individual

It is quite simple and quick to register as a self-employed person. See our dedicated instructions on; for a complete description of what the procedure entails.

• How to Register as a Self-Employed Person (SELF-EMPLOY
• When you become self-employed, there are five things you must accomplish.

Tax Returns for Self-Assessment

After you've registered as self-employed, you should receive a self-assessment notice automatically at the end of each tax year, which runs from April 6 to April 5.

HMRC encourages all taxpayers to file their self-assessment returns online these days, so the days of filing a paper tax return are practically gone.

This is the most secure method of submitting your tax return. HMRC's Self Assessment Online has more information.

The deadline to file a paper tax return is the 31st of October following the end of the tax year. Because the deadline for submitting an online return is the 31st January after the end of the tax year, filing your taxes online offers you an extra three months to finish your return.

For the tax year spanning from 6 April 2021 to 5 April 2022, for example, a paper tax return must be completed to HMRC by October 31, 2022. If you choose to submit it online, you will have until January 31, 2023 to do so.

You must pay all taxes due for that tax year by the 31st of January deadline.

Make sure you don't make these 10 common self-assessment tax return blunders when filling out your return.

Account-based payments

You'll have to make 'payments on account' once you've started paying tax through the annual self-assessment system. These are essentially payments made in advance for the tax you will most likely owe for the current tax year.

Payments on account are due to HMRC twice a year, the first on the 31st of January and the second on the 31st of July. Each payment equals half of the tax you owe for the preceding tax year.

If you're paying tax for the first time through the self-assessment system, be aware that your first tax bill may be significantly more than you anticipated.

If you launched your firm in May 2021, for example, you'll need to file a self-assessment tax return for the tax year that runs from April 6, 2021, to April 5, 2022.

By the 31st of January 2023, you must file a tax return for this period and pay any tax due to HMRC.

You'll also need to pay the first payment on account for the 2021/22 tax year by the same date, in addition to your tax bill for 2020/21.

If your self-assessment tax bill for 2021/22 was £10,000, you'll need to pay that plus an additional £5,000 payment on account (half of the tax payable for the previous tax year) by the same 31st January 2023 deadline for the 2022/23 year.

You'd also have to make a second £5,000 payment on account before July 31, 2023.

As a result, it's critical that you consider this and set aside enough money to cover your tax expenses when they're due. HMRC will punish you if you are late filing your tax return or paying your tax.

You can apply to HMRC to have your payments on account reduced if you believe your income for the following tax year will be significantly lower.

What will my tax bill be like?

The personal allowance for the 2021/2 tax year is £12,570. This is the maximum amount you can make before having to pay any income tax.

If your income exceeds this threshold in 2021/22, you will be taxed at the following rates:

On income up to £50,270, the basic income tax rate is 20%.

The 40% higher income tax rate applies to earnings between £50,271 and £150,000.

On income over £150,000, there is a 45 percent additional income tax rate.

Read 10 Ways Small Business Owners Can Pay Less Tax for suggestions on how to pay less tax.

Contributions to National Insurance (NICs)

As a sole trader, you will be required to pay National Insurance Contributions in addition to income tax (NICs). The amount you must pay is determined by your income level.

There are two sorts of NICs that single traders must pay at the moment. If your profits exceed £6,515 (2021/22 Tax Year), you must pay Class 2 NICs of £3.05 per week, as well as Class 4 NICs.

During the annual self-assessment procedure, HMRC will calculate the amount of Class 4 NICs you owe. Your responsibility is determined by the amount of profit made by your business: 9% on earnings between £9,568 and £50,270, and 2% on profits beyond this level.