Tax as sole-trader?

Giggs_11

Hey

I'm in the process of seriously considering an online business as a sole-trader. The thing that concerns me is how tax works for sole-traders?

Its simple when you work for someone because the tax and NIC is already deducted, but how would it work for a sole-trader? Do you have to pay tax weekly/monthly or do you pay for it when you do your self-assessment at the end of the year? (and is it the same for NIC?)

And what documents do I need to keep for these purposes? Every invoice I give out to customers?

Thanks

Annisele

Have you seen this HRMC guide? It gives a pretty good description of the basics.

InsideInsurance

Giggs_11 wrote: »

Its simple when you work for someone because the tax and NIC is already deducted, but how would it work for a sole-trader? Do you have to pay tax weekly/monthly or do you pay for it when you do your self-assessment at the end of the year? (and is it the same for NIC?)

And what documents do I need to keep for these purposes? Every invoice I give out to customers?

Its a little more complex.

Class II NIC is paid as you go but is a low figure (a couple of pounds a week from memory)

The rest of your tax is dealt with by your self assessment (assuming you arent VAT registered). You do the tax assessment annually by january of the following year. So April 2013 to April 2014 has to be submitted online in Jan 2015 and paid by the end of the same month.

As to records, you need to keep records of all incoming and outgoing monies in terms of receipts, invoices, bank statements etc for 7 years (effectively).

For a small business it is not onerous as long as you get in a good habit from the outset and keep it in terms of maintaining spreadsheets or ledgers of all the monies and filing the paperwork.

Giggs_11

Thanks for the replies guys.

Does anyone here have any experience of filling out a self assessment? Are the questions confusing/full of jargon lol?

edit: And can I also ask if the self assessment/NIC is the only thing I need to submit to the government every year?

InsideInsurance

Giggs_11 wrote: »

Thanks for the replies guys.

Does anyone here have any experience of filling out a self assessment? Are the questions confusing/full of jargon lol?

edit: And can I also ask if the self assessment/NIC is the only thing I need to submit to the government every year?

If you have a modest turnover (in business levels) then the main part of the form is exceptional simple and you simply enter rolled up numbers (ie total revenue, total allowable expenses).

There are only a few questions near the end of the form that get any more technical and generally you'll just be answering no or leaving them blank.

The idea is that if you are smart enough to run a business you are smart enough to do the form.

Giggs_11

Thanks again InsideInsurance. I guess this may be my Q&A thread as after 1 question answered another one pops up!

If HMRC was to tax only the profits of the company, is that before or after me taking a wage? Say I turned over £100k, profit was £30k and I took £15k as a wage. Would the government tax me on the £15k net profit, the £15k wage, or the whole lot??

I'll definitely be seeing an accountant before I start the business but I'd like to go in there knowing as much as possible first

lpgm

If you're a sole trader, you don't pay yourself a wage - you live off the taxed profits of your business. So, in your example, your profit of £30k is taxed, at normal personal tax rates, and you get to keep the rest.

Of course, because you don't actually pay the tax straightaway, you need to make sure you keep enough money back to cover it!

Giggs_11

lpgm wrote: »

If you're a sole trader, you don't pay yourself a wage - you live off the taxed profits of your business. So, in your example, your profit of £30k is taxed, at normal personal tax rates, and you get to keep the rest.

Of course, because you don't actually pay the tax straightaway, you need to make sure you keep enough money back to cover it!

I see. So how would you note that in your accounts for expenses? Just put 'drawings' and the amount?

Also wouldn't people take out lump sums for themselves out of the profits before they are taxed to pay less tax? Sorry for all the questions

Lovelyjoolz

You can't just draw sums out to avoid tax. All the business expenses have to be accounted for. You have to hava a record of every penny in and every penny out. If you don't have a receipt/invoice for it then you can't claim it as an expense.

If you made £30k profit, your books will show that and you'll pay tax on it. Drawing large sums out without legitimate reason (and a legitimate receipt) is called Tax Evasion

Giggs_11

Lovelyjoolz wrote: »

You can't just draw sums out to avoid tax. All the business expenses have to be accounted for. You have to hava a record of every penny in and every penny out. If you don't have a receipt/invoice for it then you can't claim it as an expense.

If you made £30k profit, your books will show that and you'll pay tax on it. Drawing large sums out without legitimate reason (and a legitimate receipt) is called Tax Evasion

I understand. So how would you have a receipt/invoice on drawings? Would I need to create one and just state that it's wages?

lpgm

Giggs_11 wrote: »

I see. So how would you note that in your accounts for expenses? Just put 'drawings' and the amount?

Also wouldn't people take out lump sums for themselves out of the profits before they are taxed to pay less tax? Sorry for all the questions

In your example, you took off £70,000 to arrive at the profit figure. It's this figure that would have to go in your tax return. It would have to be made up of proper business deductions and expenses, like cost of sales, staff wages (but not your own living expenses), insurance, utilities, phone bills, paperclips... Certainly not random 'lump sums'.