The life of a sole trader - keeping records and the dreaded tax return
The last tax year (2017/18) is nearly 5 months behind us and the online deadline for filing and paying your Self-Assessment tax return for that tax year is just over 5 months ahead of us; midnight on 31 January 2019.
If you’ve only just transitioned from an employee to self-employed, it is vital that you recognise the key tax change. No longer is your employer deducting tax at source each month. Instead, you are responsible for assessing your own tax each year and paying the annual tax liability out of your drawings. This can come as quite a shock to new sole-traders who are used to being taxed ‘behind the scenes’. It is extremely important to be aware of this fact and a good rule of thumb is to put aside at least 20% of your monthly takings to go towards this bill.
HMRC will also take ‘payments on account’ when your tax liability is greater than £1,000. This means that you pay in advance for the following tax year, 50% on 31 January and 50% on 31 July, with the amounts based on half your previous year’s tax bill.
For example, your tax liability for 2017/18 is £5,000.
If this is your first self-assessment tax return, then on 31 January 2019, you will pay £5,000 plus 50% again towards the next year’s bill, so a total of £7,500. On 31 July 2019, you will pay £2,500.
If it is not your first self-assessment tax return, depending on what payments on account you made in the prior year, you may have to pay a balancing amount on 31 January 2019 (i.e. £5,000 less amounts already paid on account) plus 50% of £5,000 towards 2018/19.
And so on.
If you know that your tax bill is going to be lower than last year, you can ask HMRC to reduce your payments on accounts.
NOW is the perfect time to start collating your information, well ahead of time, so that you have fair warning of your tax liability and can plan ahead to make that payment. By calculating your tax liability now, you can start ring-fencing a small amount each month towards the total liability rather than find yourself in a last minute situation with a tax bill that you cannot or will struggle to meet. Having a grasp on your financials is key.
How GSM can help
We help a wide variety of sole-traders and entrepreneurs every year. If you have bags of receipts stashed under your bed, don’t think for one minute that you are the only one. It’s not disorganised. It’s because you are devoting your time on what matters – your business. At GSM, we have a team of trainees who are ready to help analyse those receipts, free up the space in your [bedroom / spare room / study / car boot / insert other place here] and alleviate the stress – it’s what they love to do. Let us do the work for you.
If you need any help whatsoever, please do not hesitate to get in touch.
For a tailored quote, please contact firstname.lastname@example.org