For anyone looking to keep a proper account of their business, whether you own your own company or you’re a new freelancer who wants to keep their business finances separate from their personal finances, it’s important that you understand at least the basics of sole trader accounting. As a sole trader who works for themselves, they are responsible for recording the incomings and outgoings of their business, no matter how much they make. In order to do this effectively, a sole trader should be aware of any tax or national insurance that they may need to pay, as well as their business expenses, and any other factors that will affect the records they intend to keep.
Set Up A Separate Bank Account
Though it’s not a legal requirement, having a separate bank account for your business finances makes things infinitely easier later on when you’re filling out your self-assessment tax return forms. If you only have a personal bank account you will have to be much more diligent when explaining your incomings and outgoings; though you should keep recipes and invoices, either way, because these are the absolute proof of your business. That said, having a separate business bank account will allow you to easily record business expenses and income, which will make completing your tax return much less time-consuming.
Know Your Tax Rates
As a sole trader, you are required to set aside money for tax each year. The amount of tax you owe will be calculated after you’ve filled in your tax return, which should highlight the incoming finances of your business. For the current tax year, 2018/2019, you have a personal allowance of £11,850 – this is the amount that you can earn this year that will not be taxed on. In 2017/2018 it was a little lower, at £11,500. For the income that you make above this figure, you will be taxed 20% on income up to £46,350. After this, you’ll be taxed more.
You only need to start paying NI if you’ve earned over £6,205. In this case, you will be paying Class 2 National Insurance (£2.95 a week). If your profits are over £8,424 a year, you’re Class 4, and should be paying more. You should contact HMRC directly to pay your NICs. For new sole traders, this can be confusing because you won’t know how much you’ve earned that first year until you’ve earned it. Once you make the threshold amount, contact HMRC.
The Importance Of Bookkeeping
Even something as simple as a cash-basis excel sheet can save you a huge headache when it comes to filling in your tax return. You should keep receipts of any work transactions as well as your rent and bills (some of these can be listed as expenses). A spreadsheet for recording your business transactions is a good solution for many, especially freelancers or owners of small businesses. Working on a cash basis is typically good for these kinds of sole traders, because you only know the exact incomings and outgoings from your bank account. But from April 2019, the spreadsheet you’ve been using will be no good. Thanks to the new Making Tax Digital rules, all businesses who are VAT registered will be required to submit their VAT returns via accredited bookkeeping software. You can find out more about that here.
Of course, it’s not always easy to keep up with all of this, especially if your business is doing well and you’re getting busy. At Cove Accountancy Services, we support sole traders just like you, keeping your accounts running smoothly and up to date. With a full suite of services, you can outsource the bits of ‘doing your accounts’ you don’t enjoy or have time for, leaving you free to focus on growing your business. For more information, just get in touch with the team at Cove Accountancy Services and book your free consultation.