A Guide to Sole Trader Self-Assessment Tax Returns
Being a sole trader has many differences compared to being an employee of a company, and it means you have to deal more directly with the HMRC when filing your Self-Assessment tax returns.
It can be an overwhelming and stressful process to get everything right for your tax return, as all of the responsibility for reporting accurately and paying taxes falls on your shoulders. However, once you get a handle on the various steps to take to file your returns properly, it can become a lot more manageable.
In this guide, we’ll show you the ins and outs of mastering your Self-Assessments to help you avoid penalties and save as much money on tax as possible
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The Basics of Sole Trader Self-Assessment Tax Returns
If you’re a sole trader and earning over £1,000 per year, then you need to register yourself with the HMRC. This is mandatory and usually most types of self-employed worker, freelancer, and contractor falls under this categorisation.
If you have other income which is untaxed, for example, rental income as a landlord, shares paid in dividends, income from foreign investments, or side hustle income, then you also need to declare this and file a Self-Assessment tax return. Registering with the HMRC has been made fully digital, so getting set up requires a smartphone or a computer with internet access.
The first thing you need to do is create a user account on the Government Gateway, which is where you will add all of your information, such as personal details, the date you started operating, and what kind of business you have. You’ll be given a Unique Taxpayer Reference, known as a UTR, which you or your accountant will use to complete Self-Assessment submissions.
When operating as a sole trader and managing your own finances, there are multiple key deadlines that you should be aware of. If you miss them, then you can have penalties added to your tax in the form of interest and even fines. It’s important to know that the UK tax year is from 6th April until 5th April the following year, so when you submit a declaration of income, it is between those two dates.
When you submit your tax return by paper, you need to do this by 31st October in the same year the tax year ended, but if you’re doing it online, you have until 31st January the following year.
What Income and Expenses Do You Need To Declare?
When you’re self-employed, any kind of income gained must be reported in your annual Self-Assessment tax return. This includes earnings from:
- Clients you’ve worked for
- Freelancing contracts
- Customers you serve
- Side hustles
- Online selling platforms
- Online gig economy work
- Rental income
- Foreign income
- Dividends received
- Any kind of royalties
You need to declare your earnings in all ways you’ve received them, whether it was by a bank transfer, paid into your PayPal, or if the job was cash in hand. HMRC can check your bank and business records to see if what you’ve declared matches what you’ve received, and if you fail to declare income, you can be investigated.
By law, you need to keep detailed records of all your incoming and outgoing expenses as a sole trader, for at least a period of 5 years after the tax year.
When you are keeping on top of your expenses and know how much is coming in and going out, you can prevent errors when filing tax returns. A lot of sole traders get stressed when submitting their tax returns as they have not kept the receipts they should have, meaning they pay more tax than necessary. There are a variety of online tools to help sole traders stay organised these days.
What Are Allowable Expenses?
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Self-Assessment Mistakes You Should Avoid
We understand that most sole traders just want to focus on their business and not have to deal with expenses and taxes, but here are some of the most common mistakes that sole traders make when filing Self-Assessment returns:
- Missing deadlines results in financial penalties
- Forgetting to include income streams
- Not claiming everything you can on allowable expenses
- Mixing up business and personal spending can cause confusion
- Not keeping accurate records of income and expenditure
- Entering wrong figures on the return due to miscalculation
These mistakes aren’t only a headache for both the sole trader and the HMRC, but they can lead to you paying the government much more than you need to.
Straightforward Accounting Solutions
Self-assessment only needs to be done once per year, but it can cause a lot of stress for sole traders, especially if they are not proficient in finances and tax calculations. When you have an accountant by your side, they can ensure you don’t miss any deadlines, keep as much of your income as possible, and offer the best financial advice, whether you are a small or large business.
If you’re a small business in the Bristol area, reach out to Pier View Accounting today for tailored, affordable support with your Self-Assessment tax returns.