Almost all businesses, regardless of size, have to prepare accounts and file tax returns. It’s only those sole traders with a turnover below £1,000 (the Trading Allowance) that do not have to file a tax return but will still need records or accounts to prove that their turnover is below that figure.
Deadline Reminders
What you have to file and when depends on the structure that you operate your business under. HMRC may send reminders of the key dates. However, the best advice is to make a list of key dates for your business and set up recurring reminders in your calendar or diary system of choice so that you do not miss a deadline.
Tax References
There are a plethora of taxes to be aware of although not all will apply to you or your business. If the tax does apply you will have a different tax reference number for each tax. Reference numbers can get a bit confusing as there are a lot of them! Whilst many of the references are termed “unique” unfortunately HMRC hasn’t found a way of having one unique reference number for your business meaning that you will actually have many “unique” references relating to both you and your business. Unfortunately, none are interchangeable and you will need to know which reference number is for which type of tax. The best advice is to keep a list of them somewhere safe.
Changing Tax Rates
The rates of tax can also be complicated as these can change every year as the Chancellor of the Exchequer makes the Annual Budget or Autumn Statement announcements; although in recent times changes have been even more frequent!
When determining the current rate of the tax applicable the best place to refer to is the GOV.uk web site. Search for the name of the tax that you are interested in and include GOV.uk in the search term. There will be many other sites that will have information about tax, tax rates and allowances. These can of course be used. However, not every site is updated when things change. So, it is worth referencing back the rates to the correct ones on GOV.uk. The same applies to tax calculators of which there are many around. Again, do check that it is the calculator for the relevant tax year.
Summary of taxes, returns and due dates
| Sole Trader | |
| Accounts | They are used to complete the self employment section of the self assessment tax return. They are usually prepared to the tax year end (5th April) but not actually filed anywhere. |
| Self Assessment Tax Return | By 31st January following the end of the tax year |
| Income Tax Due | By 31st January following the end of the tax year |
| Payments on Account | 31st January and 31st July |
| PAYE – Full Payment Submission (FPS) | Monthly on or before the date you pay your employees |
| PAYE – Employer Payment Summary (EPS) | Monthly returns due by 19th of the following month |
| PAYE (tax & NI) due | Monthly by 22nd of the following month if electronically made or 19th if sent by post |
| VAT return | Quarterly, 1 month and 7 days following the end of the quarter |
| VAT to pay | Quarterly, 1 month and 7 days following the end of the quarter although if paid by direct debit this is usually taken by HMRC on or around the 10th |
Briefly:
- a sole trader will pay income tax on their profits by the 31st January following the end of the tax year as part of the self assessment tax return filing process. You may also be required to make payments on account on 31st January and 31st July
- if a business employs people it will have to register for PAYE
- if a business exceeds the VAT registration threshold it will have to register for VAT. It can also register voluntarily before it reaches the threshold
A sole trader does not have to file the accounts anywhere with the figures from the accounts merely used to complete the self employment supplement of the self assessment.
Sole Trader Tax
A sole trader will pay income tax and national insurance on profits from their business subject to the current rates and allowances.
Income Tax
Income tax is paid on all income after the personal allowance, which includes profits from a sole trader business. The current income tax rates and personal allowance can be found at https://www.gov.uk/income-tax-rates.
National Insurance
A sole trader may pay Class Four National Insurance. If any amounts are due they will be calculated annually and collected through your self assessment.
Note – Class Two National Insurance is being phased out from April 2024. The rules in place up to that date are included here for reference.
Class Two
If your profits (income less costs) are above the Lower Profits Limit you will pay Class Two National Insurance which is set at amount per week. If your profits are below the Small Profits Threshold then you can choose to make voluntary Class Two National Insurance payments. If your profits are between the Small Profits Threshold and the Lower Profits Limit whilst there is no Class Two National Insurance payments to make, you are treated as though you have made the payments. This is the rule so that you could be entitled to certain benefits.
Class Four
Class Four National Insurance is paid where profits exceed a certain amount.
The current rates and thresholds for Class Two and Four National Insurance can be found at https://www.gov.uk/self-employed-national-insurance-rates.
Accounts
A set of accounts, also known as financial statements, are the summary of and output from the collection and analysis of the financial transactions of the business. Every business needs to produce them, even if it is just to prove that they do not need to file a tax return. A basic set of accounts would comprise the Profit and Loss account and a Balance Sheet.
Accounts for a sole trader are generally prepared by reference to the income tax year meaning that they run from 6th April to 5th April.
The accounts do not have to be filed with HMRC but are needed to complete the self assessment tax return– the figures from your accounts are summarised and entered into the relevant boxes on the self assessment self employed supplement referred to as an SA103.
The self assessment tax return must be filed by midnight on 31st January following the end of the tax year.
So for the tax year 2022 / 2023, which runs from 6th April 2022 to 5th April 2023, the self assessment must be filed by midnight on 31st January 2024.
Any tax due must also be settled by that date.
How to pay your Self Assessment tax bill
You can make a payment for your self assessment tax bill in a number of ways, see https://www.gov.uk/pay-self-assessment-tax-bill. When making a self assessment tax payment this needs to be accompanied by an 11 character payment reference which is made up of your 10 digit Unique Taxpayer Reference (UTR) followed by the letter ‘K’.
Income Tax Unique Taxpayer Reference
When a sole trader registers for self assessment they will be sent a 10-digit Unique Taxpayer Reference (UTR) in the post generally within 10 days of registering with HMRC. This is the main tax reference that a sole trader will need.
If the sole trader employs people, besides themselves, they will also register for and run payroll meaning that they will also have the PAYE – Pay As You Earn reference numbers.
Similarly if they register for VAT the sole trader business will have a VAT registration number.
That’s about it for a sole trader. Being the most simplest of business structures it is much more straight forward when it comes to the number of tax reference numbers.