SERVICES FOR BUSINESS OWNERS
Sole Trader Tax Returns
Although being a sole trader is one of the simplest ways to get started in business, there are many legal and financial processes that need to be followed.
Just because you are flying solo, doesn’t mean you need to handle your accounts alone!
At Butt Miller we have been helping sole traders from a range of sectors grow their businesses for decades. Whether you are starting out from scratch and need to register a new enterprise, or are seeking assistance managing your tax returns and annual accounts, then we can tailor-make a sole trader accountancy package just for you.
What is a sole trader?
A sole trader is an individual that works for themselves in their own business making them self-employed. Unlike a business run through a limited company, a sole trader is not a separate legal entity to the business.
They are considered to be as one.
Do I need to file a self-assessment tax return?
The legal position is that you must notify HMRC if you have a tax liability arising from self employment.
HMRC’s guidance indicates that they expect you to register for self assessment if your self employed income from your own business exceeds £1,000 before expenses.
If HMRC issue you a notice to fill in a tax return, you must complete a tax return, irrespective of whether you have a tax liability, unless HMRC agree to withdraw the return.
How do self-assessment tax returns work?
The tax year runs from 6th April – 5th April. As a sole trader, in simple terms you need to add up all your business related income, otherwise known as turnover, between these dates and deduct all the business tax deductible expenses to give you a taxable income or profit.
These figures are included in the self assessment tax return that you submit to HMRC. Your income tax and national insurance liability is then calculated based on your profit.
HMRC expect you to complete your self assessment tax return online via your government gateway account, but many sole traders appoint an accountant to do this for them.
When should my accountant start the tax returns process?
The deadline for filing a self assessment tax return is the 31st January following the end of the tax year.
For example, for the tax year 6th April 2021 – 5th April 2022, the filing deadline is 31st January 2023. It is better for the tax return process to start as soon as possible after the 5th April, as penalties will be incurred if the deadline is not met.
It is important for those who are self employed to keep accounting records up to date throughout the year, in order to have an idea of how the business is performing and to allow you to proactively plan for future expenses or dips in trade. You also want to be in a position to estimate your tax liabilities.
In the same way that VAT registered businesses currently report, as of April 2024 HMRC will require all businesses with turnover in excess of £10,000 to switch to quarterly reporting of income.
What expenses can you claim?
As a self-employed sole trader, you can claim any expense that relates wholly and exclusively to your business.
It is helpful to set up a dedicated business bank account and pay any business expenses out of this account to make it easier to identify your costs. Every trade will be different, but common examples of allowable expenses are:
Raw materials/supplies – anything you buy in to sell on, whether or not you change the item before sale.
Travel costs – fuel, train fares, parking.
Office costs – stationery, small equipment.
Big ticket items – vans or large machinery will be allowable if they are used for the business, but the tax relief may be given in a slightly different way to other expenses.
You can claim a proportion of expenses that you would have as part of your living costs, such as telephone costs and electricity bills. The amount you can claim will depend on the respective private and business use of the items.
For example, if your phone bill is £40 per month and you use your phone 50% of the time for business use, then you can claim £20 as an expense. Bear in mind that HMRC can challenge the costs you claim and will expect you to be able to demonstrate that the split between private and business use is realistic.
Keeping a record of your use of any mixed expenses that you claim would be helpful in the event of HMRC enquiring into your return.
HMRC have also published flat rate expenses that can be used instead of claiming actual costs for sole traders. This can be easier than keeping strict records. The simplified allowances cover business vehicle costs, working from home and living in your business premises.
If your business expenses total less than £1,000, you can instead choose to claim the trading allowance, which is a £1,000 allowance to cover all costs. However, if your turnover is less than £1,000, you can only claim an amount equal to your turnover. The trading allowance cannot create a loss.
How Butt Miller can help with your tax returns?
At Butt Miller we can help sole traders with the self assessment process, contact us today.
Whether you are happy to do your own bookkeeping and simply would like us to fill in your tax return, or if you would like us to take on your bookkeeping, produce a set of accounts and subsequently complete your return, we offer a host of bespoke packages for sole traders.
Using the specialist knowledge we have at Butt Miller, we aim to help every client optimise their position and give proactive advice when things change.
Professional advice can be invaluable to a sole trader as we will make sure that you don’t claim expenses that are not allowable, yet will make you aware of any expenses we feel you should be benefitting from.
We can also help you register for self assessment and file it for you if needed.
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Check if our frequently asked questions can shed more light
Why do I need to fill in a self-assessment tax return?
Income tax and national insurance is automatically deducted from employment income every month.
However, as a sole trader you are expected to report your own income and HMRC therefore requires you to fill in a tax return every year. This is to ensure you pay the correct amount of income tax and National Insurance.
HMRC will use the self assessment form to check that the tax you pay is correct as they can check any numbers that are included in the return.
The tax and National Insurance that is collected by HMRC, is used for funding public services such as the NHS, pensions, education and welfare system, as well as investment projects such as road, rail and housing.
What are the self-assessment tax return deadlines?
As a sole trader you must register for your first self-assessment return by 5th October following the end of the tax year if you have not already received a notice from HMRC to complete a return.
Tax returns must be filed by the 31st January following the end of the tax year. If you get something wrong on the form, then you have up to a year to correct the return.
You may need to pay tax on 31 January and 31 July each year, depending on your circumstances. HMRC may send you a self assessment tax bill, but if they don't you are still required to pay tax by the due date.
See below for examples relating to the 5th April 2022 Tax Year (6th April 2021 – 5th April 2022):
Example 1 - I have not yet completed my 2022 tax return, when is the deadline? The deadline is 31st January 2023 if you file the tax return online. The date for submitting a paper tax return is 31 October 2023.
Example 2 - I have not received a notice to complete a tax return but I know my income for the tax year is above £1,000, when should I notify HMRC? You should notify HMRC by 5th October 2022.
Example 3 I have to amend my 2022 tax return, when is the last day that I can do this? The deadline for submitting this tax return is the 31st January 2023, so if you have already sent it to HMRC you have until the 31st January 2024 to amend the return.
What happens if I miss the self-assessment tax return deadline?
If you miss the 31st January filing deadline HMRC will charge a penalty of £100, providing you you are unable to give a reasonable excuse. If you are more than 3 months late, HMRC will start to charge a penalty of £10 per day up to 90 days. After 6 months you will be charged an additional 5% of the tax due plus the penalties mentioned above.
The penalties are summarised in the table below.
Period of delay
Up to 3 months
Between 3-6 months
£10 per day (£900 maximum) (plus above)
Between 6-12 months
5% of tax due (plus above)
You can appeal against a penalty if you have a reasonable excuse for the delay. What constitutes a reasonable excuse will depend on your circumstances.
How are payments calculated and when are they due?
How much tax you pay is calculated by comparing your annual income to the tax bands and allowances available to you.
Most people are entitled to a personal allowance, which is free of tax and you pay the basic income tax rate of 20% above this level. National Insurance starts at 9% when your income exceeds £9,568. When your income gets to £5ok, the tax rate increases to 40%, but the National Insurance drops to 2% on the income above £50k. If your income should exceed £150k the tax rate increases to 45% on any income above that level.
If your tax liability for the previous tax year is greater than £1,000 you will be asked to make advance payments on account. These are calculated as 50% of the tax payable under self assessment for the previous year. This can help the self employed stay on top of their tax.
These payments on account are due on the 31st January and 31st July following the end of the tax year. If the payments on account do not cover the following year’s tax liability, you will also be required to make a balancing payment to make up the difference.
See below for examples:
2020/21 is my first year of trade and my tax liability was £5,000. My 2021/22 liability is £6,000, what payments do I have to make?
31st January 2022 - £7,500 (£5,000 for 2020/21 plus first payment on account of 2021/22 £2,500)
31st July 2022 – Second payment on account - £2,500 (50% of 2020/21)
31 January 2023 - £4,000 (£1,000 balance for 2021/22 and £3,000 on account of 2022/23)
Having the balancing payment and the first payment on account payable on the same day can result in a large tax bill in the first year for a sole trader.
If you don't pay your tax bill on time, you will pay interest on a daily basis and late balancing payments are also subject to penalties.
HMRC offers a number of ways to pay your tax bill and your accountant can advise you on this.
What earnings do I pay national insurance on?
For 2021/22 if your profit (income less expenses) is more than £6,515 and you are under retirement age, you will be required to make Class 2 National Insurance Contributions of £3.05 per week. This equates to £158.60 for the year.
You do not have to pay this weekly as it is collected when you pay your tax liability once you have filed your tax return. The Class 2 contributions count towards your State Pension entitlement.
You will also be required to make Class 4 National Insurance Contributions on any profits above £9,568. Any profits between £9,568 and £50,270 will be subject to a 9% National Insurance charge and any profits above £50,270 will be subject to a 2% National Insurance charge.
See below for example:
My profits for the 2022 tax year are £55,000, how much National Insurance will I pay?
Class 2 – £158.60 (£3.05 per week as profits are above £6,515)
Class 4 Lower Limit - £3,663.18 (£50,270 - £9,568 = £40,702 x 9%)
Class 4 Upper Limit - £94.60 (£55,000 - £50,270 = £4,730 x 2%)
If you also have income from employment at the same time, the National Insurance contributions that are deducted from your pay may reduce the National Insurance you are required to pay on your self employed income.
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Sole Trader Tax Returns
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