So you're a sole trader and not directly employed and you don’t receive a salary or wage in the traditional sense.
So how do you pay yourself as a sole trader and then pay any tax due?
You pay yourself based on personal drawings from the business, and you pay Income Tax and National Insurance Contributions based on the profits your business makes.
Record keeping how important is it?
It’s important to keep a record of any personal drawings you take from the business to pay yourself. This helps you to keep on top of your bookkeeping and helps when calculating your profits, as eventually, you pay tax on your profits. There are some great software options for self employed - Freeagent is great if you mostly subcontract and Quickbooks for solely working for yourself. You’ll also need to put some money aside to pay your tax bill when you submit your annual self assessment.
How do I pay myself from my business?
You can simply take money from your business account to pay yourself as a sole trader. We strongly recommend that you use a separate business bank account for your sole trader finances this just keeps everything simple. There are some great sole trader banking options.You need to make sure that you keep a record of these drawings, along with any other incomings and outgoings. You do need to put some money aside to pay any tax you owe. It should be easily accessible, but you could always put it into a savings account or if you use Starling or similar you can lock it away with there 'spaces option'
How much should I set aside to pay my taxes?
Obviously, the higher the amount of profit you report, the more you’ll earn and the greater your tax liability will be. We recommend you set aside the following amounts from your regular drawings to settle your Income Tax and National Insurance liabilities each year:
As your profit rises in your business it is worth speaking to an Accountant to check if you and your business would be better off moving to a Limited company formation.
What about other income?
If you have additional income from employment as well as your self-employed income, you’ll need to declare it on your annual Self Assessment tax return. Your employer should have deducted the income tax and National Insurance due through the PAYE scheme and you will need to obtain a P60 from them.
Similarly, if you receive any dividends from a company or other income (such as from property), you must include these on your Self Assessment and HMRC will calculate the tax you owe.
How is my profit reported to HMRC and how do I pay?
Your profits are reported to HMRC each tax year via your Self assessment return. Your income tax and NICs (National Insurance Contributions) calculation will highlight how much you’ll be paying on your final tax bill. Your Self Assessment must be filed and all taxes you owe must be paid before the 31st January each year.
What is payment on account?
If your tax bill is more than £1,000 for the year, you’ll be required to make a payment on account. This is HMRC’s way of ensuring tax is paid regularly and it goes towards your next Self Assessment. There are two payments made towards the Payment on Account: the first must be made by 31st January and the second payment is due on or before the 31st July each year.
You can tell HMRC in advance if you will have less sole trade profit in the next tax year and they may reduce your Payment on Account to HMRC.
What if I only have a small side business do I need to declare additional income?
You should register as self-employed as soon as you receive any income that is not taxed at source – but you may not need to pay any tax on that sole trader income until you earn over £1,000 in a single tax year. Any tax or National Insurance due would be calculated and paid through your self assessment.
We hope this has been helpful for help with your self assessment please get in touch with us at firstname.lastname@example.org