Sole Trader

Getting Started As A Sole Trader

If you are new to self employment this explains what you need to do to get your accounts up and running as a sole trader to ensure that your finances are being well managed.

Getting Started

The first thing you must do is register with HM Revenue & Customs (HMRC) as being a self employed sole trader. In fact you have to do this within three months of setting up otherwise you can incur a fine.

To register all you need to do is telephone the Help Line for the Newly Self-Employed on 08459 15 45 15.

National Insurance

One of the reasons for registering as self employed is that you will need to start paying National Insurance in a different way than if you were employed.

As a self employed person you will pay the following National Insurance contributions:

Class 2 - This is a fixed weekly amount paid either by monthly direct debit or a quarterly bill.
Class 4 - This is a percentage of your annual taxable profit from self-employment, which you start paying when your profits reach a certain limit.

Class 4 contributions are paid along with your income tax using the Self Assessment tax return.

Self Assessment

Self Assessment is the tax return you must complete each year if you are self employed. It is used to calculate how much Income Tax and Class 4 National Insurance you need to pay.

It can be filled in on line or a paper copy can be completed.

The form SA103 is the Self Employment supplement to the self assessment.

Once you have submitted your return you will receive a Statement Of Account which shows how much:

you owe
you have paid
you have to pay

Key Dates

The key dates you will need to be aware of for your accounts are:

31 October for submitting a paper self assessment return and to have the tax calculation done by HM Revenue & Customs
31 January for submitting an on line self assessment return
31 January for payment of Income Tax and Class 4 National Insurance for the previous accounting year.

For example for the year ended 5 April 2008, you will pay your Income Tax and Class 4 National Insurance on 31 January 2009. In addition payments will be made on 31 January and 31 July for payments on account.

What Are Payments On account?

For the second and subsequent years that you are self employed, you may be required to make a payment of Income Tax on account.

A payment on account is an estimate of what your tax bill will be at the end of your accounting year, based on your previous year's profits.

Payments on account are usually made in two instalments on 31 January and 31 July.

In practice this could mean that on 31 January in your second year of trading you will need to pay:

the tax due on your profit from your first year of trading plus
half of the estimated tax due on your profit for the second year of trading

So it will be really important to make sure that you know what your tax liability is as you incur it, so that you can set aside the appropriate amount from the profit you are making in your business.

Why Keep Accounts

There are two main reasons for keeping your accounts up to date:

To work out how much you have earned, your profit
To calculate how much tax you owe the HM Revenue & Customs so you can budget for this throughout the tax year

To simplify your accounts you can use the headings and layout as set out in the self employed self assessment form SA103, Income and Expenses section, mentioned above.

If you are unsure how to keep your accounts the notes to the self assessment form SA103 do provide a good explanation or you may need to employ an accountant to help you keep your books and complete your tax returns.