It is very easy to be a sole trader. As soon as you buy, grow, make, create something to sell, or charge for your time, then you are a sole trader. You are not a sole trader if you just sell your own stuff e.g those clothes that did not fit, or the kids old toys, your car or home.
A Sole Trader is you in business in your own right, doing something with a view to a profit, and hence potentially creating taxable self-employment income.
- Income from a property rental business is considered investment income, rather than self-employment income, unless the type of rental qualifies as Furnished Holiday Letting.
- Two or more people in business together is a partnership but still self-employment income
Hobby, Casual Earnings or Sole Trader
A hobby is something you do for fun, that usually makes a loss. If you make profits, then you should inform HMRC because it has now become a sole trader business. However, if you are always making a loss then they do not want to know.
Casual Earnings is one off income and needs to be declared on your tax return if you have one, but if less than about £2,500 pa then HMRC do not really want to know.
If you start a business with a view to making a profit, then there is no threshold; you are considered to be in business from the moment you first sell your services or goods. Please note this first date as it will be the date you officially start self employment.
How to Register with HMRC?
You need to tell HMRC you are in business by 1st October following the 5th April following when you started your business (i.e. 6 months after the end of the tax year in which you start). This is done via HMRC’s website (Gov.uk/set-up-business) where you can register your self-employment status and to pay tax via Self Assessment. This will include set up of an online account for you to manage your taxes via Government Gateway website. HMRC will then ask you to prepare a personal tax return.
We can assist you with the registration, and if you are not into computers then we can do everything via our HMRC account for agents.
What is a Personal Tax Return?
Also referred to as a Self Assessment Tax Return, this return is for the following purposes:
- Report all your personal income & Capital Gains along with any taxes already paid so that HMRC can assess whether you have paid the right amount (this includes rental income, pension income, interest on received on bank accounts, etc.).
- Your opportunity to claim tax reliefs (e.g. gift aid, blind person allowances, tool allowances, etc.) or expenses for tax purposes (e.g. professional subscriptions, mileage, etc.).
- For HMRC to assess and collect income related charges, e.g. student loan repayments and child benefit repayments.
You need to complete a Personal Tax Return for every tax year that HMRC requests you to do so. These have to be submitted to HMRC in paper format by 31st October following the end of the tax year or in electronic format by 31st January following the end of the tax year.
You can prepare and submit your Personal tax Returns yourself; if you have setup a personal online HMRC account or we can prepare this for you, but we do ask that you provide us with plenty of time to do so, including time to hunt for missing info.
What do I have to Report for my Self Employment?
On your personal tax return you have to report the total income you have received from your self employment activities in the year (this is called your turnover).
You also have the opportunity to make a claim for reasonable expenses, incurred in the running of your business, that are to be deducted from this income before it is taxed.
There is a new £1,000 tax free allowance, that can be claimed against sole trader income instead of expenses (as long as none of that income is from your employer)
There is a new £1,000 tax free allowance, that can be claimed against property rental income instead of expenses (as long as none of that income is from your employer)
If your turnover is less than £85,000 then you just need to report the total of these expenses. If however your turnover is more than £85,000, then on your return, you have to give a breakdown of expenses being claimed.
HMRC gives little guidance on what may be considered a reasonable expense and only a few allowances you can use instead of actual expenses. This is where an accountant or tax advisor can help with suggestions of expenses to reduce your tax bill.
A full set of accounts is not essential but they are very useful in presenting your income in a recognised format to the tax man or lenders, etc.
As mentioned above, reporting and hence recording your income is essential and must be done on an ongoing basis. You need to hold onto all your records for 6 tax years and these records need to include all sources of income, not just your business income e.g. rental income, pension income, interest received, gifts, etc.
Claiming expenses are optional but those that are claimed must be recorded too, but to do this they need to be identified/separated and collated.
- All expenses claimed must be for business – a separate bank account or card to keep these costs separate is a good idea
- All expenses claimed must be reasonable – so can you justify/explain the expenses claimed in both nature and amount. Receipts are very good here but not essential.
The more expenses you have then the more you need to use systems to process them. In a few years time it could also become compulsory to do this electronically i.e. using computers. We can help you design or choose a system set it up and run it to achieve the desired results.
Taxes to Pay on Your Self Employed Income
The following taxes are due on your self-employment income – calculated via your tax return:-
- Class 2 National Insurance Contributions – £3.00/week if your profits exceed £6,365 in a tax year.
- Class 4 National Insurance Contributions – 9.0% on profits between £8,624-£50,000 in a tax year and 2.0% on profits over £50,000 in a tax year.
- Income Tax – Self Employment profits are added on to your other income to determine a tax rate based on the band they fall into 0%, 20%, 40% or 45%.
When to Pay your Personal Tax
The tax for the year is due for payment by 31st January following the end of the tax year, even if you have not received a specific bill/demand for the relevant amount. Hence the tax bill may not arrive until well after you have earned the income (so do remember to put money aside as you earn it).
If the tax bill exceeds £1,000 then HMRC will not want to wait for next year’s return, to collect your dues. They will ask for 6 monthly payments on account on 31st January within the year and 31st July following. WARNING: this means your first tax bill may be 150% of the tax due.