Setting up as sole trader. Know your facts.

There are many benefits to becoming self-employed or a sole trader. You are your own boss, you can enjoy the flexibility of being able to schedule a day that fits around you and you get to keep all the profits. However, you must also keep your own accounts and pay your own taxes.

We have some useful information and a few suggestions for you:

Set up a separate bank account away from your personal bank account for your sole trader finances. This will hugely simplify your record keeping as having to deduce what is business related and what is personal could become a laborious task.

Keep records of all your receipts and expenses. Even a successful company can become exposed to cash flow problems if it is not managed properly which can lead to negative affects on your business. Keeping good records not only makes book-keeping simpler but will help you keep track of your cash flow. Records to be kept include all receipts and expenses, all evidence for goods purchased and sold and any other supporting documents relating to your work transactions. The retention period for holding such documentation is 5 years.

It is important you have an understanding of the income tax and national insurance thresholds. Any money you withdraw from the business is treated as your salary and from this there needs to be an amount kept aside to pay your taxes. Tip: Why not transfer this amount to a savings account where you can be earning interest on it until the time comes to pay it over the authorities.

Every individual is given a personal allowance. This is the amount you can earn each year on which you don’t have to pay tax on. The personal allowance for 2019/20 is £12,500. Any income in excess of this becomes taxable.

• Up to £50,000 – taxed at the basic rate 20%.
• Between £50,001 – £150,000 – taxed at the higher rate 40%.
• Over £150,000 – taxed at the additional higher rate 45%.

Sounds simple, however, there are factors that need to be considered, i.e. is your income in excess of £100,000, are you married? If you are not confident on the rules you should seek advice and speak to an accountant.

As a sole trader you must pay Class 2 and Class 4 national insurance contributions (NICs). Both are based on the trading profits of the business for the year.

Class 2 NICs – If your profits are in excess of £6,365 (2019/20) you will pay a flat £3.00 per week. This is collected through the self-assessment system payable by 31 January following the end of the tax year.

Class 4 NICs – You will pay:
• Up to £8,632 – 0%
• Between £8,633 – £50,000 – 9%
• Over £50,000 – 2%

Class 4’s are paid authorities at same as you pay your income tax.

All sole traders must submit an annual self-assessment tax return to record your income and expenses and calculate the amount tax and NIC you must pay. This should be a painless process if your record keeping is kept in good order. If you are in your first year of trading, there is an additional “payment on account” that you must be aware of. These are advance payments of your income tax and NICs for the future tax year based on half of your previous year’s income tax and Class 4 NICS bill. Although your cashflow may take a hit in the first year of trading with having to pay this additional expense, it does have the purpose of being able to spread the cost and pay off your tax bill in advance. These payments on account are due 31st January and 31st July. This means that when you come to file 2019/20 accounts you will have already made two payments against this with the difference between the actual tax & NIC calculated and what has been paid already becoming payable/repayable 31st January 2021. Then the cycle begins again with you paying half of 2019/20 on 31st January 2021 and 31st July 2021 as your payments on account.

If your turnover exceeds £85,000 (2019/20) in a 12-month period or you expect to exceed the threshold in a single 30-day period, you must register for VAT. Although this does become an additional administrative burden, it does come with some benefits:

• VAT can be reclaimed on purchases you made for the business. The purchases that VAT can reclaimed on largely follows the expenses rules below; and
• Your VAT registration number can be displayed on your company website, invoices etc. which can give the perception to potential customers of being larger.

All records must be kept for a minimum of 6 years. It sounds like a lot of work but good record keeping can be of huge benefit to you simplifying the process and saving you time.

You can claim your business expenses to reduce your trading profits. As long as the expenditure is solely business related the following expenses should be allowable:

• Business premises (not including the purchase of the building) i.e. rent, repairs and maintenance, insurance, utilities etc;
• Equipment;
• Travel i.e. business-related car/van, train, plane, hotel rooms;
• Cost of stock and materials;
• Professional fess i.e. accountant, lawyer;
• Bank charges and bank interest;
• Business insurance;
• Marketing and advertising;
• Cost of membership to your professional body; and
• If you are working from home, some of your household expenditure could be allowable.

Note though that not all expenses are allowable:

• Client entertaining;
• Travel between home and your normal place of work;
• Non-professional memberships / subscriptions i.e. gym membership;
• Gifts of food, alcohol or tobacco; and
• Where an expense has both a personal and business element, only the business proportion is allowable.

Both of the above lists are not exhaustive. You should be careful and vigilant when deciding whether expenses are allowable or not as this could result in you not paying enough tax or overpaying on tax. Both inevitably can be less than ideal for you and your business.

At Invicta Accounting Ltd we can save you time, money and headaches.

• Our cloud accounting software can help you keep track of your financials – send invoices, record your expenses, monitor your cashflow and always know how much tax you owe anytime and anywhere in the world.
• Our cloud accounting software is MTD compatible which makes submitting your VAT returns as simple as clicking a button.
• We can assist you with your annual self-assessment tax return giving you the peace of mind that you are paying the correct amount of tax.
• Be safe in the knowledge that we remind you of those important accounting deadlines.
• Gain access to expert accounting resources and knowledgeable professionals who can assist with registering you with HMRC, what expenses you are able to claim for and what you need to pay.

We want to see you succeed and help your business grow. Give Invicta a call today on 01624 672358 or email us at for a free no obligation chat.