Starting your own business is an exciting venture, but it also comes with new responsibilities, particularly when it comes to tax. If you’re opening a business as a sole trader in the UK, understanding the self-assessment process is crucial to managing your finances and staying compliant with HMRC.
In this guide, we’ll walk you through everything you need to know as a sole trader about self-assessment, from registration to filing your tax return and provide some useful tips to make the process as straightforward as possible.
What Is Self-Assessment?
Self-assessment is HMRC’s system for collecting income tax from individuals and businesses that don’t have tax automatically deducted from their wages or earnings. As a sole trader, you’re responsible for calculating your own tax and submitting an annual tax return to declare your income and expenses.
Who Needs to Complete a Self-Assessment Tax Return?
As a sole trader, you must complete a self-assessment tax return if:
- You earned more than £1,000 from your business during the tax year (6th April to 5th April).
- You want to claim tax relief on expenses incurred as part of running your business.
You may also need to file a self-assessment if you have other forms of income, such as rental income or income from investments.
How much tax you will pay as a sole trader will depend on you your overall “taxable income” and how the income is made up.
How to Register for Self-Assessment
Before you can file a self-assessment tax return, you’ll need to register as self-employed with HMRC. This can be done online through the government’s website.
Here’s a simple step-by-step guide to get you started:
- Register Online – Go to the HMRC website and register for self-assessment. You’ll need your personal details and National Insurance number to do this.
- Get Your Unique Taxpayer Reference (UTR) – After registering, you’ll receive a UTR number by post. Keep this safe—it’s needed whenever you communicate with HMRC about your tax return.
- Set Up a Government Gateway Account – You’ll also need to create a Government Gateway account to submit your tax returns online.
Make sure to register in good time—HMRC recommends doing so at least a few weeks before your first return is due.
Key Deadlines to Remember
As a sole trader, it’s essential to meet HMRC’s key deadlines to avoid penalties:
- 5th October – Deadline to register for self-assessment if you’re a new sole trader.
- 31st January – Deadline for submitting your online tax return for the previous tax year (6th April – 5th April).
- 31st January – Deadline for paying any tax owed.
- 31st July – Deadline for paying your second payment on account (if applicable).
Failure to submit your tax return or pay your tax bill on time could result in fines and interest charges.
What Information Do You Need to Complete Your Self-Assessment?
When filing your self-assessment tax return, you’ll need to provide details of your income and expenses. Here’s what to gather before you start:
- Income – Total income from your business, which can include sales, services, or freelance work.
- Allowable Expenses – These are the costs of running your business that you can deduct from your income. Examples include office supplies, travel expenses, and professional fees.
- Other Income – Include any other taxable income, such as bank interest, dividends, or rental income.
Keeping accurate and up-to-date records throughout the year will make this process much easier when it comes to filing your return.
Claiming Allowable Expenses
One of the advantages of being a sole trader is that you can deduct certain business expenses to reduce your tax liability. These are known as “allowable expenses.”
Common allowable expenses include:
- Office supplies (e.g., stationery, postage)
- Business travel costs (excluding commuting)
- Business-related utility bills and phone charges
- Advertising and marketing costs
- Professional fees, such as accountant or solicitor fees
For example, if you run your business from home, you can claim a portion of your household bills (such as heating and electricity) as a business expense.
How to Submit Your Self-Assessment Tax Return
Once you’ve gathered all the necessary information, you’re ready to submit your tax return. Most sole traders opt to file their returns online via HMRC’s self-assessment portal, though you can still file a paper return if you prefer (the deadline for paper returns is earlier, on 31st October).
Here’s a basic overview of the process:
- Log in to your Government Gateway account.
- Complete the self-assessment form (SA100) – Enter your personal details, income, expenses and any other relevant information.
- Review your tax calculation – HMRC will automatically calculate how much tax and National Insurance you owe based on the information provided.
- Submit your tax return – Once you’re satisfied that everything is correct, submit the return.
After submitting your return, HMRC will send a bill outlining the tax and National Insurance you owe. You can pay this through several methods, including online banking, credit/debit card, or by setting up a payment plan.
What Happens After You Submit?
After submitting your return, there are a few key things to remember:
- Payment on Account – If your tax bill is over £1,000, HMRC will ask you to make advance payments towards next year’s tax bill, known as “payment on account.” This is paid in two instalments: one by 31st January and one by 31st July.
- Keep Records – You must keep records of your income and expenses for at least five years after the submission deadline. HMRC may ask to see these if they audit your business.
Common Mistakes to Avoid
To make the process as smooth as possible, here are some common mistakes to watch out for:
- Missing Deadlines – Late submissions and payments result in penalties, so make sure to mark the deadlines in your calendar.
- Not Including All Income – Make sure you report all forms of income, not just business earnings. HMRC can access information from third parties, such as banks and employers.
- Claiming Non-Allowable Expenses – Only claim expenses that are genuinely for business purposes. Personal costs are not deductible, and HMRC may penalise incorrect claims.
Getting Help with Your Self-Assessment
For new sole traders, the self-assessment process can feel a little daunting at first. However, there’s plenty of help available. HMRC offers guides and webinars to assist you, and if you’re unsure about anything, you can contact them directly for advice.
Alternatively, hiring an accountant who specialises in small businesses can be a worthwhile investment. They can ensure your return is accurate and that you’re making the most of available tax reliefs.
Final Thoughts
As a sole trader, completing your self-assessment tax return is an important part of running your business. Staying organised, keeping good records, and understanding allowable expenses will make the process much easier. By following this guide and ensuring that you meet HMRC’s deadlines, you can focus more on growing your business and less on tax worries.
Whether you choose to do it yourself or enlist professional help, understanding the self-assessment process will give you confidence that your business finances are in good shape.