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The Definitive Guide To The Accounting Of Sole Traders

The feeling of independence and freedom that you’ll experience being a sole trader is remarkable, but there are crucial administrative tasks to complete before your journey begins.

As a sole trader you’ll be classified as self-employed and will have the taxes and regulations to adhere to – but do not fret! We’re here to guide you about the regulations you’ll have to follow to ensure that your books are balanced. As sole trader accountants, we’re the most qualified to manage and assist the sole trader’s accounts.

Begin your journey to open your own business!

If you’re considering taking the exciting step of establishing your own business, becoming your boss, and operating your self-interest You have a variety of possibilities. You can decide to establish your own limited company form an association with a partner or consider setting up as a sole trader.

Each of these business structures differs slightly, with different approaches to the best way to approach accounting and bookkeeping. Find out more details about them in our blog. What’s the difference between a sole trading company and a limited corporation?

Am I a one-time trader?

If you own your own business on your own as an individual and believe that you are self-employed, then you need to set up as a sole trader. If you’re self-employed, this means that you are working as a sole proprietor, and not for an employer. Sole traders are self-employed business owners, but they are the only proprietors of their companies.

If any of the following applies to your business then you need to establish yourself as a sole trader:

  • If you made more than     £1,000 in self-employment between the 6th of April 2019 to 5 April 2020.
  • If you’re required to prove that you’re self-employed (to claim tax-free child care for instance)
  • If you’re looking to make class 2. National Insurance payments to help you receive benefits, then

As a sole trader, you can keep all of the profits from your business once you’ve paid any tax on the profits. However, on the other side of this coin is that you’re personally accountable for any loss your company suffers.

How do I establish myself to be a sole trader?

To establish yourself in the sole trader category you will need to inform HMRC that you’re able to pay tax via tax-free Self Assessment tax return. You’ll have to complete a tax return each year and keep a check on your finances; however, our sole trader accounting team can assist you in this aspect that runs your enterprise.

It is possible to register your sole trading account via the Government portal or through the help of our friendly, hands-on assistance from our sole trader account team.

What are my responsibilities as a sole trader?

While being a sole trader and your boss is an exciting approach to the business of your choice, you must also take care to meet essential responsibilities you must keep track of each month.

The responsibilities are:

  • Keep track of your company’s costs and sales
  • Making an annual Self Assessment tax return every year
  • In the event of paying income tax on your earnings, and Class 2 or Class 4 National Insurance

How do I pay taxes as a sole trader?

Whatever way you manage your company, it’s extremely crucial to be aware of the taxes you’ll need to pay.

For the year of taxation 2020/2021, the maximum Personal Allowance is £12,500. If you’re a business in the UK and earn this amount, the income isn’t tax-deductible. If you’re a sole trader, you’ll not be required to be tax-paying unless earning more than £12,500. But regardless of whether you have the taxpayer to be paid or not you’ll have to file the Self Assessment Tax Form.

It is also important to be aware of tax rates when you are a sole trader. There are three main taxes: the base rate as well as the higher rate. the higher rate

  • The tax band for basic rates is 20%. This applies to you when your income is greater than £50,000.
  • The higher range of rates is 40 percent and applies to you if the income falls between £50,501 and £150,000.
  • The higher tax band is 45%, and it applies to those filing an income of more than £150,000.

Payment of National Insurance as a sole trader

Three months after becoming self-employed, you’ll be the sole trader – you must notify HMRC to verify that you’re making payments for National Insurance and provide the information required to submit an annual self-assessment tax return. year. It is necessary to apply for a National Insurance number if you’re moving to the UK to establish your own business.

If you’re a sole trader then you’ll need to pay two forms of National Insurance as you fall in the category of self-employed:

  • You’ll be required to pay Class 2. National Insurance if your profits exceed £6,475 in a year
  • You’ll be required to pay the Class 4 National Insurance if your earnings exceed £9,501 in a calendar year.

You’ll be able to pay for National Insurance through the self-assessment form that we mentioned previously. There are also specific regulations that are covered by the government via their website.

A quick note on VAT

If your annual turnover is more than £85,000, then that’s fantastic! But that also means you’ll have to sign up for VAT. You may also sign up voluntarily in the event that your sales are below the threshold and if it works for you and your company for example. when you sell to other companies which are VAT registered and you are looking to recover VAT.

It may appear daunting however our sole trader account assistance will assist you in staying on top of everything you have to do as a sole, independent trading company.

Should I open a company account?

As a sole trader, you and your business are considered to be one company. This means you aren’t legally required to have an account with a bank for business. But it’s extremely useful to have a corporate bank account, and we strongly recommend that you open one! If you have a business account, you will be able to manage your business’ finances separate from your expenses and incomings making your business more manageable. This more organized approach to managing your budget will allow it to be easier to file your self-assessment tax return, too.

You’ll be able to get a business bank account from all major banks, both traditional as well as challenger banks. Just ensure you look them up and find out what services they provide before deciding which one is right for your needs. The minimal cost associated with opening a business account is not compared to the value the account can be for your company!

Find out more information about how to set up a business bank account on the blog.

Name your company as a sole trader

You must adhere to certain guidelines for running and naming your business sole trader. You are able to trade under your own name or choose a different name for your company.

When it comes to name conventions there are a few crucial things to bear in your mind. Names should not be:

  • Include “limited”, “Ltd or ‘limited liability partnership’ and ‘LLP’. Also, include “public limited company” or “plc”
  • Inflict harm or offence in any way
  • The identical to an existing trademark, or infringe on any copyright registered.

It’s an excellent idea to make your name trademarked too. This will stop anyone else who trades under your same name as your company.

The government website has an excellent guideline on the words you may need approval to incorporate in your company name, as well as whom you’ll need permission from.

Tips for staying organized as a sole trader

In addition to helping you stay on top of your obligations being a sole-trader we thought it might be useful to offer some tips to help you.

  • Begin keeping a track Keep an accounting of your company’s inflows and outgoings and then decide to follow our suggestions and open a business account, you’ll find it much simpler to pay taxes.
  • Keep your receipts. When the self-assessment deadline gets closer You’ll be grateful you had all of your receipts in the back of your hand! Receipts are a crucial part of tracking any expenditure associated with your business. Make a file of your receipts, or take every time you receive them, or use a business software such as Mazuma’s app to ensure you have all the information all in one spot.
  • Make claims for expenses when you can be a sole-trader working at home, you might be eligible to claim cash back through business expenses. It doesn’t matter if it’s travel costs or business rent rates, office equipment, or even advertising costs There are many hidden costs associated with operating your own business that you are able to claim back.
  • Be prepared for tax time – This is a crucial point Always be ready for tax obligations! Try to save at least 20 percent of your income each month to avoid being bailed out by tax bills.

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