About Sole Trader:
A person who runs their own business and owns it as an individual is known as a sole trader. The business is run by one individual and an important point to get noted is that there is no legal distinction between the business entity and the owner.
There are many ways which a sole trader must know to get it right in the first time itself to avoid the risk of incorrect tax returns. A sole trader is required to register as self-employed with HMRC if he earns more than £1,000 as a sole trader in a given tax year.
Points to remember for tax return submission:
There are some crucial points which a person needs to keep in his mind for a successful sole trader tax return submission. Points mentioned below:
- There are different types of taxes, which need to get paid namely Self Assessment tax return, Income Tax and National Insurance contributions (NICs). These taxes are the standard ones. The Self Assessment tax return can be submitted in a paper or online format.
- For self-employed, there are two dedicated classes of NICs. You need to pay Class 2 if you are earning more than £6365. And Class 4 NIC will be applicable only if you earn above £8632.
- A sole trader should be familiarised with the different tax bands and be aware of the tax-free personal allowance to determine how much tax will be paid on income. The trading allowance with returns received via tax-exempt accounts, such as an Individual Savings Account is specific categories of earnings where you do not have to pay Income Tax.
- The accurate records should be maintained regarding income and expenses to retain relevant information, which is essential. Personal records should also be maintained properly.
- There are two methods of maintaining the proper records: cash basis and traditional. In regards, to cash basis, a sole trader would only record the related information and pay Income Tax on the money that has been received or spent in the given accounting period. However, in terms of Traditional accounting, records by the date invoiced or billed are required. Therefore, it clearly states that a sole trader needs to keep additional records so that tax return will contain accurate information.
- A sole trader should claim for all expenses possible along with the capital expenditures to reduce your tax liability. The tax-free trading allowance will be used in such circumstance where a sole trader would not be able to offset either expenses or capital allowances.
- Retaining records will be easy if a sole trader uses dedicated software, and when the tax return deadline approaches, he/she will have all the accurate data. The usage of software will be time-saving, and it will provide you with precise figures within the cloud to keep all the relevant information.
With the mentioned tips and tools with the other information provided, a sole trader will find that he/she can easily, and successfully file a sole-trader tax return without issue.