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SOLE TRADER ACCOUNTS
As a sole trader, you must follow your own set of tax rules and regulations.
A self-employed individual is known as someone who runs their own business without being incorporated into the company structure that other owners use for formalising things like records keeping or payroll processing. It can be more informal though they still need an operating agreement in place just like any other business entity does. And remember this: don’t forget about filing annual returns with HMRC if there’s money at stake.
There are many benefits to running your own business as a sole trader, but you need to stay top of the books. If done right can be an excellent way to maximize profits and minimize risk in this type of account setup. Here’s what we know about sole trader accounts and bookkeeping when starting as a sole trader.
DO I NEED A BUSINESS ACCOUNT AS A SOLE TRADER?
If you’re a sole trader and your business is considered one entity, then legally, there’s no need for an account. However, we recommend that every small-business owner create personal and professional sole trader accounts just like they do when dealing with their finances separately because it will be easier than having everything in one place.
However, it might seem like not creating any separate financial management would leave us open to potential identity theft or fraud. This doesn’t mean setting up multiple bank/credit cards, etc., on different websites, potentially leading someone else to take over our social security number (especially if linked).
Entrepreneurs or an individual can create sole trader accounts without any risk of their information leaking. In addition, the business will maintain its professional appearance and easily identify income/expenditure, which means you are more likely than not going file your self-assessment tax return with the necessary documentation.
When you’re starting a business, you must set up a bank account correctly. To find out which banks are best for your company and what features they offer, make sure to look at pricing and fees associated with opening an account as these can differ depending on whether one has been designated “business” related in their profile information online.
SOLE TRADER ACCOUNTS TAXES
As a business owner, the intricacies of taxation can be difficult to understand. Many rules and regulations apply in any country, so it’s important for you as a self-employed individual or small company just starting to know what is required before jumping into something without knowing all the needs while doing the first time round or simply book a free consultation with our professional business tax accountants
For the 2021/22 tax year, a personal income allowance of £12,570 will exempt you from paying taxes. This means that in the UK, these funds won’t be taxed, and so if your sole trader makes more than that, they only must pay on their excess over £12,570. This isn’t always true; certain tradespeople, such as self-employed farmers or fishers, can also arise situations that get specific allowances that effectively make them partially exempt from taxation. While others, like company directors, may not be covered by any exemption at all.
The tax system in the United Kingdom is a complicated one, with three sorts of bands. There’s a basic rate which applies to income up until £50k, and it has a 20% taxation rate; higher classifies all earners who make more than £50K to £150K at 40%. The additional 45 percent also falls to income of £150K or above.
NATIONAL INSURANCE CONTRIBUTIONS
Paying your taxes can be time-consuming and tedious work. The best way to avoid the hassle is simply setting up a direct debit for all future payments, which will automatically deduct these necessary fees from any cheque or bank account that you receive in return. However, two different types of tax will need payment: Class 2 and Class 4 NICs.
- As an employee, if you earn more than £6,515 during the tax year, your Class 2 NIC is payable at £3.05 per week and will need to be paid by anyone who has this amount or less in earnings for self-employment purposes.
- If you are self-employed and your annual profits exceed £9,568, it’s best to take out a Class 4 NICs. The rate of 9% applies only to these members, but there is an additional 2% on top for those who have made more than that amount each year over the last five years in total – making sure not just anyone can get away without paying this fee.
In the United Kingdom, businesses that have a turnover exceeding £85K per year will need to register for Value Added Tax (VAT). You can find more information on registering and meeting this threshold on VAT Services.
Keeping a business’s records is critical to the process of paying and dealing with taxes. Make sure you have all receipts, invoices, apps that allow picture taking – this will help when it comes time for the self-assessment deadline. A bank account may also come in handy if managing expenses aren’t already included within your accounting software or bookkeeping system. Naseems Accountants offer many services tailored towards entrepreneurs, like keeping track of income/expenditure; they provide easy access to funds through savings accounts.
SELF-ASSESSMENT TAX RETURN
Working in the United Kingdom is not always easy, but it can be made a lot simpler with self-assessment. This means that before you even start your business or launch an online project. For example, filing taxes and paying National Insurance Contributions (NICs) by January 31st every year to ensure there aren’t any issues come deadline day in the end when your return needs submitting. For 2021/2022, this was due on April 6th, 2023, so keep those dates top of mind. Self-assessment allows individuals living in the UK to work without needing vast amounts of cash upfront before they’ve done anything profitable.
It is possible to deal with taxes on your own, but if it’s not something you have done before or know-how, seeking professional help will be beneficial. We have an expert team of sole trader accountants, Who can make all the difference between staying afloat financially and paying less than what would otherwise apply under law. Therefore, saving money over time while ensuring one’s financial health remains strong throughout everything.
CLAIMING BUSINESS EXPENSES
It is important to keep track of all your business expenses because they can claim them as such, and if you work from home, some of those costs may also qualify for reimbursement.
As a self-employed sole trader, you can claim back on anything from business expenses to tax relief. This includes things such as:
- Material or equipment you offer for sale
- Payrolls for employees
- Costs of travel
- Rent rates for a business-like water, light heating, insurance, and security
- Office equipment, such as telephones and stationery
- The interest rate on bank loans
- Courses in training
One of the most important things for tax preparation is paying your taxes when they are due, which means putting away at least 20% each month. If you can’t afford this, it might not work out well with paying them on time and getting into an even worse situation than before. Therefore, we must save enough money beforehand to ensure nothing goes wrong during these hectic months when deadlines loom large over us.
If you’re a sole trader and struggle with taxes, consider using bookkeeping software to help navigate the many intricacies. With online accounting programs such as Xero accounting software, for example:
- You can deal with all aspects of your business in one place, from invoicing customers to reconciling bank statements.
- You’ll know exactly where every penny goes thanks to their VAT reports which tell you how much tax should be paid on income/ expenses, so no more guessing when submitting returns each year – just input them into your program.
- And lastly, if you ever need advice about what type of account would suit best according to whether it’s an Inventory expense or Income Account respectively, Xero Accountants are waiting.
MISTAKES TO AVOID AS SOLE TRADER
- AVOIDING MISTAKES IS KEY TO SUCCESS: So, make sure you avoid the common pitfalls that can come from bookkeeping and accounts management. You may not know it, but there are a lot of mistakes that you can make with your finances and the finance in business and need to avoid it:
- DO NOT LEAVE IT TO THE LAST MINUTE: Paying taxes is a part of life – it’s just the way things are done. But if you don’t have enough money set aside each month, then your lack can hurt when tax time comes around again. It might seem inconvenient at first but taking care now will pay off in spades later.
- A SINGLE OR SEPERATE ACCOUNT: It’s important to ensure you don’t get confused about your finances. Create a separate account for different purposes, such as personal and business transactions, so they can be appropriately identified by creditors or other institutions to avoid any confusion with accounting records.
- DO NOT KEEP RECEIPTS: Even the smallest expenses of customers can be an enormous amount. Customer receipts are no exception to this rule and should not get thrown away without looking at their value first.
- THE BANK RECONCILIATION: It’s important to review your account balance and transaction history every month. This will help you monitor the health of everything for any issues or concerns on an ongoing basis instead of just when there are problems with payments, withdrawals, etc.