©2019 by Ashgrove Accountants Ltd (Company Registration No: 08046804)

SELF EMPLOYED

Setting up as sole trader:

If you’re a sole trader, you run your own business as an individual and are self-employed.

You can keep all your business’s profits after you’ve paid tax on them. You’re personally responsible for any losses your business makes. You must also follow certain rules on running and naming your business.

 Sole traders must register with HM Revenue and Customs (HMRC). They can take on staff, being a sole trader means you're responsible for the business, not that you have to work alone.

Your responsibilities:

You will need to:

 

  • Keeping records of your business's sales and expenses,

  • Sending a self assessment tax return every year,

  • Paying income tax on your profits and class 2 and class 4 national insurance

  • Your business debts,

  • Bills for anything you buy for your business,

  • Registering for vat if your turnover reaches the VAT threshold,

  • Registering with the construction industry scheme if you're a contractor or sub-contractor in the construction industry.

 

Naming your business:

You can trade under your own name, or you can choose another name for your business. You don’t need to register your name.

 

You must include your name and business name (if you have one) on official paperwork, for example invoices and letters.

 

Your business name will be the cornerstone of your brand. It should work well wherever you use it - on the phone, in your logo, signage, stationery, advertisements, website, email and any other media you plan to use to reach the market.

 

Sole trader names must not:

 

  • Include ‘limited’, ‘Ltd’, ‘limited liability partnership’, ‘LLP’, ‘public limited company’ or ‘plc’

  • Be offensive

  • Be the same as an existing trade mark

  • Your name also can’t contain a ‘sensitive’ word or expression, or suggest a connection with government or local authorities, unless you get permission.

 

You should be aware that any name can contain a ‘sensitive’ word or expression, or suggest a connection with government or local authorities, unless you get permission. Even if it’s your name, you have to check which words you need permission to use, and who from.

You’ll need to register your name as a trade mark if you want to stop people from trading under your business name.

 

Self employment:

When you start a business and decide to work for yourself, you’re classed as a sole trader. This means you’re self-employed - even if you haven’t yet informed HM Revenue and Customs (HMRC).

However, once you set up as a sole trader or as a partner in a partnership if there’s more than one of you; you will be responsible for paying your own income tax and National Insurance (NICs).

 

Running a business:

You’re probably self-employed if you:

  • Run your business for yourself and take responsibility for its success or failure

  • Have several customers at the same time

  • Can decide how, where and when you do your work

  • Can hire other people at your own expense to help you or to do the work for you

  • Provide the main items of equipment to do your work

  • Are responsible for finishing any unsatisfactory work in your own time

  • Charge an agreed fixed price for your work

  • Sell goods or services to make a profit (including through websites or apps)

 

If you start working as self-employed, you must register with HMRC.

Many of these also apply if you own a limited company but you’re not classed as self-employed by HMRC. You can be both employed and self-employed at the same time-an owner and employee of your company. Like if “you work for an employer during the day and run your own business in the evenings”.

 

 

You’re likely to be trading if you:

 

  • Sell regularly to make a profit

  • Make items to sell for profit

  • Sell online, at car boot sales or through classified adverts on a regular basis

  • Earn commission from selling goods for other people

  • Are paid for a service you provide

  • You’re probably not trading if you sell some unwanted items occasionally or you don’t plan to make a profit. You can’t use any losses you make as part of a hobby to reduce your tax bill.

 

If you are not planning to make a profit or you are selling some unwanted items occasionally, you are not trading and you can’t use any losses you make as part of a hobby to reduce your tax bill.

 

Register as self-employed:

 

  • You earned more than £1,000 from self-employment between 6 April 2017 and 5 April 2018;

  • You need to prove you’re self-employed, for example to claim Tax-Free Childcare;

  • You want to make voluntary Class 2 National Insurance payments to help you qualify for benefits.

 

If you have to send a tax return and did not send one last year, you need to register for Self Assessment and Class 2 National Insurance.

 

 

There are other business structures apart from being a sole trader. For example, you can:

Become a partner in a business partnership

Set up your own limited company

Self employed national insurance rates:

When you are a self-employed you usually pay 2 types of National Insurance:

  • Class 2 if your profits are £6,205 or more a year

  • Class 4 if your profits are £8,424 or more a year

Your business will have various running costs. You work out your profits by deducting some of these costs to work out your taxable profit as long as they’re allowable expenses.

 

You will pay £2.95 a week if you are Class 2; or 9% on profits between £8,424 and £46,350; 2% on profits over £46,350 if you are Class 4. (Rate for tax year 2018 to 2019)

You want to pay Class 2 and Class 4 National Insurance through Self Assessment. But you might want to pay voluntary contributions if you are:

  • Examiners, moderators, invigilators and people who set exam questions

  • People who run businesses involving land or property

  • Ministers of religion who don’t receive a salary or stipend

  • People who make investments for themselves or others - but not as a business and without getting a fee or commission

 

Self assessment tax return:

Self Assessment is a system HM Revenue and Customs (HMRC) use to collect Income Tax.

Tax return is a report that includes all people and businesses incomes. Tax is usually deducted automatically from wages, pensions and savings.

The tax return report should be filed and sent to HM Revenue and Customs (HMRC) after the end of the tax year (5 April). Then pay your Self Assessment bill by 31 January.

 

Deadlines:

It is better to send your tax return by the deadline. You can send a paper form, or you can log in and file your tax return online. You’ll need to register first and fill in and send your tax return to HM Revenue and Customs (HMRC).You can also go back to a tax return you’ve already started, or even check your details, view returns and print your tax calculation.

If you did not send an online return last year, allow extra time (up to 20 working days). There are different ways to register if you’re:

  • Self-employed or a sole trader

  • Not self-employed

  • Registering a partner or partnership

 

To fill your return, you need to keep records of your business income and expenses (for example bank statements or receipts), your personal income as well so you can fill it correctly. HMRC will calculate what you owe based on what you report.

Business records:

You will need to keep records of your business income and expenses and your personal income as well. If you’re the nominated partner in a partnership, you must also keep records for the partnership.

For limited companies, there are different rules on keeping records. You’ll need to choose an accounting method.

Basically traditional accounting is used by many businesses to record income and expenses by the date you invoiced or were billed.

Most small businesses with an income of £150,000 or less can use cash basis reporting.

This means, you only record income or expenses when you receive money or pay a bill. With this method you won’t need to pay Income Tax on money you haven’t yet received in your accounting period.

Expenses if you are self employed:

 

As self-employed, your business will have various running costs. You can deduct some of these costs to work out your taxable profit as long as they’re allowable expenses (Allowable expenses don’t include money taken from your business to pay for private purchases). But you must report any item you make personal use of as a company benefit.

Simplified expenses:

Simplified expenses can be used by sole traders or business partnerships that have no companies as partners. Furthermore simplified expenses are a way of calculating some of your business expenses using flat rates instead of working out your actual business costs, to claim for 3 areas of the business which are particularly difficult to work out:

  • Motoring costs;

  • Expenses of running a business from home, and;

  • Private use of business premises.

You must calculate all other expenses by working out the actual costs.

 

The way that you can simplify expenses is:

 

  1. Record your business miles for vehicles, hours you work at home and how many people live at your business premises over the year.

 

  1. At the end of the tax year use the flat rates for vehicles, working from home, and living at your business premises to work out your expenses.

 

  1. Include these amounts in the total for your expenses in your Self Assessment tax return.

 

You don’t have to use simplified expenses. You can decide if it suits your business. If so, you will use it to compare what you can claim using simplified expenses with what you can claim by working out the actual costs. This will help you work out if simplified expenses checker suits your business.

 

Simplified expenses:

 

If you're self-employed (either a sole trader or a partner in a business), there are certain expenses you can charge your business and therefore get a tax deduction for. Simplified expenses are a way of calculating some of those expenses using flat rates instead of working out your actual business costs.

You don’t have to use simplified expenses. You can decide if it suits your business.

The expenses you can claim using the simplified expenses rules are

Types of expenses you can use flat rates for:

  • Business costs for vehicles

  • Working from home

  • Living in your business premises

 

To use simplified expenses you need to:

  1. Record your business miles for vehicles, hours you work at home and how many people live at your business premises over the year.

 

  1. At the end of the tax year use the flat rates for vehicles, working from home, and living at your business premises to work out your expenses.

 

  1. Include these amounts in the total for your expenses in your Self Assessment tax return.

 

Furthermore, you can also use simplified expenses checker if you’re a sole trader or partnership. There are actually 2 ways you can calculate business expenses for vehicles, working from home and living on your business premises. You can use simplified expenses or calculate your expenses by working out the actual costs.