20 May Essential Accounting for Sole Traders

When you start set up as a sole trader, there are a million and one things to think about, including balancing the books.

In fact, for most people, this will be the one they probably think about (or want to think about) least, but accounting for sole traders is fundamental for business success.

It’s a bit like business insurance (more about that later), you set up your floristry business or your painting and decorating firm, and you’re so keen to do a good job that the less exciting things like keeping records for tax and checking out what business insurance you should have can fall by the wayside.

However, spending a bit of time at the outset could save you a lot of time (and money) later on. So however hard or boring you think this stuff is, it makes sense to make it a priority sooner rather than later.

Set yourself up for success

It’s a hackneyed analogy, but setting up your accounts is a bit like digging good foundations for a house – it’s not the most exciting part of the project but without it your house might fall down.

Here are our top tips for sole trader accounts basics.

1. Separate your banking

Having a separate bank account is not a legal requirement for a sole trader, but it definitely makes things simpler for accounting purposes as anything going in and out of the separate account will be for businesses purposes only. So, when you come to do your Self Assessment Tax Return, you won’t need to spend time trying to remember what was a personal expense and what was a business expense.

If you decide that you want a business account, it’s a good idea to shop around as fees, overdraft facilities and additional charges for some services vary between providers.

2. Understand business tax and National insurance rates

You will be required to register for and pay tax and national insurance. So it’s important to set aside money for these payments. Your Personal Tax Allowance is an amount you can earn from your business without paying tax, and anything you earn over that amount will be taxed at one of three rates – Basic Income Tax, Higher Income Tax and, Additional Income Tax. The more you earn above your personal allowance the more you pay in Tax.

All sole traders will need to pay Class 2 NICs (National Insurance Contributions) on annual profits over a certain amount (£6,725 for tax year 2022/2023 – £3.15 per week).

Class 4 NICs are worked out as a percentage of income over a certain amount (tax year 2022 to 2023 it is 10.25% on profits between £9,881 and £50,270, 3.25% on profits over £50,270)

Most people pay their NICs through the Self Assessment system.

3. Register for and complete a Self Assessment Tax Return

You will need to register as a sole trader with HMRC and fill in a yearly Self Assessment Tax Return (SATR). Register as soon as possible when you start trading and complete your SATR in plenty of time to avoid any penalties. It’s simplest to register and complete your tax return online.

It’s important to be as accurate as possible when completing your SATR. If your accounts are complex you may need to hire an accountant, but for most sole traders, as long as you have kept good records and give yourself plenty of time, it is possible to do this yourself.

4. Find out what you can claim as business expenses

Before completing your SATR you should understand what you can and can’t claim as business expenses. Items such as travel costs, banking charges, office supplies, advertising, business insurance, and tools and equipment are all deductible from your income. If you work out of your home, you may be able to claim a portion of your rent and bills as business expenses depending on how much time you are there.

Check out the Gov.UK list for all allowable expenses.

5. Find out what records you need to keep

As a sole trader your book keeping tasks are likely to be fairly simple, but you should still make sure you understand exactly what you need to record and track (such as monthly income and expenditure) and what evidence you need to keep (invoices and receipts, etc.).

You could set up a spread sheet to track your expenses and income or you could invest in some bookkeeping software or an online accounting package. There are lots of options out there to help make bookkeeping easier, but the main thing is to do it.

It’s another well-worn cliché that some sole traders stuff everything into a drawer and only look at it three days before their tax is due, but sadly, this does happen and it makes things very difficult.

Try to schedule in some time weekly or monthly to look at and record all your expenses and income so you can keep your business records up to date and ready for your SATR.

6. Understand payments on account

You may be required to make advanced payments on account to help pay your Tax and Class 4 NICs. Advance payments become due to HMRC on 31 January and 31 July annually and go towards the next year’s tax and NIC amount payable.

HMRC calculates the amount you need to pay based on your previous year’s tax return. If you still have tax to pay after having paid your payments on account, you will need to pay the balance in January.

As the payments crossover this can seem confusing, so it’s important to understand the payment schedules to make sure you have enough money set aside when the payment deadlines arise.

7. Register for VAT (maybe)

You will need to register for VAT if your annual taxable turnover is more than £85,000, or if you expect your turnover to exceed £85,000 in the coming 30 days.

There is also a requirement for sole traders and businesses based outside the UK to register for VAT if they supply goods or services to the UK.

You can register for VAT with HMRC if your turnover is less than £85,000.

Sole trader essentials don’t end with Tax and National Insurance

Yes, making sure you’ve got your accounting sorted is one major part of being a sole trader, and probably the next most important foundation is business insurance.

Knowing what you must have and what will be most useful for you in your chosen trade is really important. Sometimes, business insurance may seem like an unnecessary expense, but if something terrible happened your insurance might just save your business and mean you can keep trading.

Tredstone Risks, powered by City Insurance, only provide business insurance, so you can be sure we know what we’re talking about.

Read more about the different types of business insurance here or give us a call to find out how we can provide the business insurance package that’s most suited to your business.