Self-assessment tax returns for sole traders

As a sole trader, each year you’ll need to complete your self-assessment tax return. HMRC requires all self-employed workers to complete their tax return to a strict deadline.

With the deadline for submitting your tax return to HMRC being 31st January each year (unless you submit a paper return for which the deadline is 31st October), there’s just a few days left to get it completed.

If you’re yet to complete your tax return and need some guidance on how to fill it in, Markel Direct will cover just that in this article as well as looking at the consequences of missing a tax return deadline.

1. Register as self-employed

Before you can consider filling in a tax return, if you’ve recently set up a business, you must inform HMRC of the potential chargeability for tax and National Insurance Contributions (NICs) by the 5th October, following the end of the tax year in which your business started.

If you haven’t filled in a self-assessment tax return before, you will need to register with HMRC so that you can get your Unique Taxpayer Reference (UTR). This will let HMRC know that you have a business and will also allow you to complete your tax return online.

Ensure that you make a note of your UTR for future use. Once you have this, you can set up a Government Gateway account. Further instructions on how to do this will be included in the letter you receive with your UTR.

Once you’ve set up your Government Gateway account, you’ll receive more correspondence including an activation code. Enter the code in your account and the initial setup is complete. You can then send your self-assessment return through this account.

2. Gather important information

There is lots of financial information required to fill out a tax return. With this in mind, you should spend some time gathering all the documents and data you need. This will include details of your earnings, income from employment (if you have a separate job), capital gains, business rent (if you have premises), pensions and business expenditure. You can find an extensive list of taxable income sources on the gov.uk site.

To gather this information, you may need copies of:

• your bank statements
• receipts
• invoices
• a P60
• student loan statements and so on.

To make it easier to complete your tax return, it’s important to keep up-to-date accounting records that cover your business’ income and outgoings.

3. Begin completing the tax return

Once you’ve gathered all the necessary information, you can begin filling in your self-assessment tax return - Form SA100. You’ll only be required to fill in the sections that are relevant to you and your business. With the online form, HMRC will remove irrelevant sections as you go through the form.

You will be required to report on what you’ve earned – this is where the information you’ve gathered with come in handy. You’ll need to provide your yearly earnings, which will include the turnover from your business, as well as any other taxable incomes, for example investments or property. Additional income should be included here, such as rental income or interest on savings.

The last part is adding in any tax-deductible business expenses. This can include the costs of:

• Office, property and equipment
• Stock, supplies and parts
• Travel expenses
• Clothing expenses
• Legal and financial costs such as business insurance
• Bills associated with your business premises such as heating and lighting
• Training courses
• Marketing

If you're an IPSE member, you have access to our expenses checklist.

Once you’ve completed the form, take a moment to check that all the information you have given is accurate. You can then submit the return via the HMRC portal and make a note of the confirmation number they provide.

Keep the information you gathered in step 2 safe. If HMRC require more information or wish to investigate further, being able to put your hands on these records will really help. When you’re self-employed, this information should be kept for at least five years after the 31st January submission deadline of the relevant tax year.

If you fail to file and pay your tax return, you will face a penalty. For your tax return, if you are a day late, the fine is £100. After three months, this increases to £900.

As well as this, you’ll face a separate charge for paying your tax late. If you delay paying your tax by 30 days, you’ll need to pay 5% of the tax you owe at that date. After 6 months, you’ll have to pay an extra 5% of the tax you owe.

The tax year runs from the 6th April to the 5th April the following year. The tax on any income earned during that time must be paid by January the following year for both returns submitted online or by post.

For instance, for the tax year 6th April 2021 to 5th of April 2022, you must register for self-assessment with HMRC by 5th October 2022. Paper tax returns must be submitted by midnight on the 31st October 2022 while online tax returns must be completed by midnight on 31st January 2023. The tax that you owe must also be paid by midnight on 31st January 2023.

Payment on account is a way for HMRC to collect taxes and National Insurance payments from you before you’ve received the tax bill. For sole traders, payment on account is a useful way of spreading the cost of a tax bill. HMRC do this by estimating the money owed using previous tax bills.

As long as your last self-assessment bill wasn’t less than £1,000 and you haven’t already paid more than 80% of the total tax owed, you can make two payments on account every year.

Together the two payments, due on the 31st January and the 31st July, will cover your previous year’s tax bill. If you pay in advance but your self-assessment income decreases year-on-year and you therefore owe less tax, you will receive a tax rebate.

For more guidance on self-assessment tax returns, visit the GOV.UK website.
 

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