As a sole trader, from the outset, you will have complete control over how you operate on a day-to-day basis.
There are many benefits to operating as a sole trader, from greater flexibility and low registration and start-up costs to lower fees for accounting services.
However, once you’ve established yourself as a sole trader and are turning in a healthy profit, you need to plan for growth.
If you want to expand your enterprise, you must ensure that your finances are in order and that your tax obligations are met. Your enterprise will have a better chance of succeeding if you are already completing these processes correctly to maximise your profits and avoid tax debt.
Various financial responsibilities must be taken into account as a sole trader. If you want to experience a successful period of growth, you must make sure you are staying on top of them.
What financial responsibilities do I have as a sole trader?
As a sole trader, you will be fully responsible for submitting an annual self-assessment tax return, paying income tax, paying class 2 and class 4 national insurance and registering for VAT if you are within the applicable threshold.
The easiest approach to guarantee that these are paid and completed accurately is to make sure your bookkeeping is in perfect order. Your company's bookkeeping, which entails maintaining correct records of all the money coming in and out, will also be entirely your responsibility. This means that each bill, invoice, and receipt will need to be accurately recorded.
It’s essential that all of this information is accurate, as you are entirely liable for all legal and financial obligations. Since an LLC does not provide you with protection, any errors that result in penalties or legal action will negatively impact you personally.
How much income tax should I be paying?
You have a legal obligation as a sole trader to pay income tax on the profits that your business makes through your annual self-assessment tax return.
For the 2023/24 tax year, the personal allowance for a sole trader is £12,570. The term personal allowance refers to the maximum income that can be earned before any income tax is due.
For income in the 2022/23 threshold, you will be taxed at the following levels pointed out in the table below.
Income tax rate | Amount of profits earned | Percentage of income tax to pay |
Basic income tax rate | £12,571 - £50,000 | 20% |
Higher income tax rate | £50,001-£150,000 | 40% |
Additional income tax rate | £150,001+ | 45% |
How much national insurance should I be paying?
As a sole trader, you have a legal responsibility to handle your own national insurance payments. You must notify HMRC within the first three months of establishing so they can ensure you are paying the correct amount of National Insurance.
Class 2 and Class 4 national insurance will be deducted from your income if your earnings exceed the personal allowance. The amount you will pay is outlined in the table below.
Class | Rate for tax year 2023 to 2024 |
Class 2 | £3.45 per week |
Class 4 | 9% on profits between £12,570 and £50,270 2% on profits over £50,279 |
This amount must be paid via your self-assessment form.
Will I have to register for VAT?
You must register for VAT if your annual revenue exceeds £85,000. You can register your business voluntarily if its yearly income falls below the threshold. This might be appropriate for your company since it will let you sell to other VAT-registered companies and claim the VAT back.
Depending on the goods or services being offered, there can be multiple VAT rates.
What expenses can I claim?
It’s important to keep an eye on any government financing opportunities that become available. From office supplies to travel costs to training courses, there are a variety of expenses you can claim back from HMRC to offset your expenditure as a sole trader. Lowering your tax burden will help you increase your profits, in turn making it easier for you to grow from a sole trader to a small business.
It can be hard to keep track of what you can claim, especially with everything else you have to consider when you’re self-employed. At One Two One Accounts, we offer specialist accounting services for sole traders.
We can relieve you of the financial burden so you can concentrate on the most important aspects of your enterprise.
Our team will keep on top of your finances, look for ways to reduce your tax liability, handle your self-assessment tax return, provide financial advice, and handle all communication with HMRC.
To learn more about our sole trader package, and other accounting services that we offer, get in touch today.