….we all know that businesses need to pay tax, but how many sole traders and small businesses are actually properly advised on what they should be paying? If you’re trading as a sole trader or partnership you are eligible to pay (how much you actually pay is a whole other ball game!!) Income Tax and National Insurance, some businesses will be required to charge VAT on their sales too.
Sole traders must complete a Self-Employment tax return at the end of each tax year. The return allows you to provide details of your business’ income and expenses. This information is used to work out how much Income Tax and National Insurance Contributions you have to pay.
Here are the basics…
– Self-employment/self-assessment return
The UK’s VAT registration threshold (above which persons making taxable supplies are required to register and account for VAT) is currently set at £85,000, although businesses can opt to register voluntarily if their taxable turnover is below this.
All you need to provide on the relevant pages of your tax return are:
– Details of your turnover
The total allowable business expenses, rather than a breakdown of each expense, net profit or loss, details of any adjustments, allowances or losses
If you prefer, you can still give a fuller breakdown of all your expenses in the relevant boxes on your tax return. Businesses below the VAT registration threshold can also use cash accounting so turnover and expenses will be cash received and payments made in the period.
– Tax and NIC liability
After deducting the personal allowance (in 2019/20 this is £12,500), profits from self-employment are paid as income tax at the basic rate of 20% on your taxable earned income that falls within the basic rate band. The basic rate band for 2019/20 is £37,500. If you have taxable earned income that exceeds the basic rate limit, you have to pay more tax.
There are two classes of National Insurance Contributions (NIC) for the self-employed. The first (called Class 2) starts at profits of £6,365 and is £3.00 per week. Class 4 NIC starts at profits of £8,632 and is payable at 9% up to profits of £50,000, 385 when Class 4 drops to 2%.
– Payment of Tax
Self-assessment payments are due by 31 January and 31 July each year. For the business profits in 2019/20 tax year (accounting periods ending by April 5, 2020) the first payment on account is due by January 31, 2020, the second payment is due by July 31, 2020 and any balance must be paid by January 31, 2021. Failure to make these deadlines will result in interest being charged.
If you feel that you are out of your depth making these returns on your own, then do not delay in contacting us at DNA Accountants, we are here to make sure you get on with what you do best, while we take care of the boring stuff. We can also make sure your money is working for you by assessing your tax efficiency. Get in touch and we’ll make your income work smarter for you.