Whether you’ve recently completed an apprenticeship and you’re looking to become self-employed, or you’ve been a business owner for years, it’s important to do your taxes correctly in order for your business to flourish. From setting up as a sole trader to dealing with taxes, VAT and national insurance, there are multiple things you need to take into account when dealing with HMRC.
Tips for setting up as a sole trader
There are multiple legal structures you could choose from when you’re breaking out on your own as a tradesman. You can either opt to set yourself up as a limited company or go for the sole trader solution. Setting up a limited company may involve extra costs and lots of administration, so it probably isn’t the best option for most tradesmen who are looking for a painless way to pay their taxes. Moreover, if you choose to set yourself up as a sole trader, you can still take on employees, despite common misconception.
Dealing with tax, VAT & national insurance
Once you have your business all set up, you also need to get your national insurance and tax affairs in order as quickly as possible. According to HMRC, you may receive your first tax and national insurance bill shortly after you register as a sole trader, so it is probably always a good idea to pull some money aside from your earnings, so you don’t come up short when your tax bill is due.
If your revenue from the business is over £70,000 per year, you’ll also need to register for VAT. Many sole traders find out that this is not necessary when starting out, but you will need to take it into account as your business grows. You’ll need to file your taxes and submit your return every year by 31st October if you choose to do it with a paper or hard copy, or by midnight on 31st January if you want to do it online. However, keep in mind that if you want to submit your tax return online, you need to register in advance.
What records do you need to keep for tax purposes?
Keeping all your records in order is a sure way to avoid any trouble with HMRC, so make sure that no matter how small your operation is, you keep an up-to-date and comprehensive list of purchases and expenditures throughout the year, starting from day one. This way, you will have everything in order should the HMRC decide to audit you.
What are some ways to keep your records manageable as a tradesman?
Throwing all your receipts and invoices in a shoebox is a recipe for disaster, so make sure you implement a system that allows you to keep all your expenses well organised. For example, you may use a 12-slot expanding file to store all your receipts, bank statements, and payslips for each month. It is also recommended to set up a separate bank account to record all your work income and purchases.
What are some mistakes to avoid when filing your taxes?
Meeting the deadline for submitting your tax return is perhaps the most important thing to do when doing your taxes. There are fines for missing the tax deadline, with an initial fine of £100 if you miss the deadline, and a further £300 if you still fail to complete your tax return three months later. As such, it’s important not to leave your tax returns until the last minute. Moreover, make sure that you keep all your invoices and receipts and don’t overestimate expenses. Finally, put an adequate amount of money aside for tax each time you get paid, so your next tax bill doesn’t come as a shock.