Tax basics for sole traders
- As a sole trader you’re taxed as a self-employed person
- You will need to submit an annual tax return showing your income from self employment
- You will need to pay personal tax on your business profits
- To calculate your profit you can deduct your business expenses from your income, and use your personal tax allowance (unless it has been used elsewhere)
- You will pay Class 1 and Class 4 National Insurance contributions (NICs)
- Even if you are still in other paid employment, your income from self-employment must be declared and the necessary tax and NI paid.
Submitting your annual sole trader or self-employed tax return
You will receive a notice to complete a tax return soon after a new tax year begins and you can complete the information and return it to HMRC using the paper forms or online.
If you wish to complete your tax return on paper, return the form by 31 October (or three months following the date of issue of the notice) and HMRC will:
- calculate your tax for you (or you can calculate it if you wish)
- tell you what to pay by the following 31 January
- collect tax through your tax code (if possible) where you owe less than £2,000.
If you want to complete your tax return online you have until 31 January, or 30 December if tax is to be collected through your tax code (if possible) where you owe less than £2,000.
If you miss the deadline date you will incur an automatic £100 penalty.
Claiming business expenses
For information on which expenses and allowances you can claim you should consult your accountant or go to one of HMRC's 'Self assessment for self-employed people' workshops. These workshops cover what is, and what is not, an allowable expense, and will give you guidance on effective record keeping and how to complete the self-assessment forms. Book an HMRC workshop in your area.
National Insurance Contributions for the self-employed
National insurance for self-employed consists of both class 1 and class 4 national insurance contributions.
Class 1 National Insurance Contributions (NICs) will be invoiced quarterly or you can choose to pay by direct debit. You will automatically receive your bill for Class 1 NICs once you have registered with HMRC as a self-employed person.
Class 4 NICs will be calculated by your accountant (or HMRC if you don’t have an accountant) as part of your tax return, and are due to be paid at the same time as your tax bill.
When you will receive your tax bill
As a sole trader you will get your main tax bill sometime in January. This bill is for half of the tax you owe for the current tax year and payment will usually be due by the end of January, so you won’t have much time to find the money if you haven’t already saved it!
You’ll get another tax bill in July, so don’t stop saving once you’ve paid your January bill. This July bill is to pay the rest of the tax you owe on the profits you expect to have made in the previous tax year. When you do your tax return for that year your accountant (or HMRC) will be able to calculate the exact amount you should have paid.
The 'balancing figure'
After taking into account the tax you paid at the end of January and the tax you paid in July, any credit or additional amount needing to be paid will be due at the end of the following January, this is called the 'balancing figure' for that year.
So for the second and subsequent years you are in business, your January tax bill will consist of half the tax due for the current tax year and the balancing figure on your tax bill for the previous year.
Tax basics for sole traders
- As a sole trader you’re taxed as a self-employed person
- You will need to submit an annual tax return showing your income from self employment
- You will need to pay personal tax on your business profits
- To calculate your profit you can deduct your business expenses from your income, and use your personal tax allowance (unless it has been used elsewhere)
- You will pay Class 1 and Class 4 National Insurance contributions (NICs)
- Even if you are still in other paid employment, your income from self-employment must be declared and the necessary tax and NI paid.
Submitting your annual sole trader or self-employed tax return
You will receive a notice to complete a tax return soon after a new tax year begins and you can complete the information and return it to HMRC using the paper forms or online.
If you wish to complete your tax return on paper, return the form by 31 October (or three months following the date of issue of the notice) and HMRC will:
- calculate your tax for you (or you can calculate it if you wish)
- tell you what to pay by the following 31 January
- collect tax through your tax code (if possible) where you owe less than £2,000.
If you want to complete your tax return online you have until 31 January, or 30 December if tax is to be collected through your tax code (if possible) where you owe less than £2,000.
If you miss the deadline date you will incur an automatic £100 penalty.
Claiming business expenses
For information on which expenses and allowances you can claim you should consult your accountant or go to one of HMRC's 'Self assessment for self-employed people' workshops. These workshops cover what is, and what is not, an allowable expense, and will give you guidance on effective record keeping and how to complete the self-assessment forms. Book an HMRC workshop in your area.
National Insurance Contributions for the self-employed
National insurance for self-employed consists of both class 1 and class 4 national insurance contributions.
Class 1 National Insurance Contributions (NICs) will be invoiced quarterly or you can choose to pay by direct debit. You will automatically receive your bill for Class 1 NICs once you have registered with HMRC as a self-employed person.
Class 4 NICs will be calculated by your accountant (or HMRC if you don’t have an accountant) as part of your tax return, and are due to be paid at the same time as your tax bill.
When you will receive your tax bill
As a sole trader you will get your main tax bill sometime in January. This bill is for half of the tax you owe for the current tax year and payment will usually be due by the end of January, so you won’t have much time to find the money if you haven’t already saved it!
You’ll get another tax bill in July, so don’t stop saving once you’ve paid your January bill. This July bill is to pay the rest of the tax you owe on the profits you expect to have made in the previous tax year. When you do your tax return for that year your accountant (or HMRC) will be able to calculate the exact amount you should have paid.
The 'balancing figure'
After taking into account the tax you paid at the end of January and the tax you paid in July, any credit or additional amount needing to be paid will be due at the end of the following January, this is called the 'balancing figure' for that year.
So for the second and subsequent years you are in business, your January tax bill will consist of half the tax due for the current tax year and the balancing figure on your tax bill for the previous year.