Key Takeaways

• Self-employment offers significant independence, allowing individuals to choose contracts, make decisions independently, and cultivate a personalised work environment for higher job satisfaction.
• The flexibility of self-employment enables better life balance and time management. It allows people to tailor their schedules around personal commitments and peak productivity periods.
• Self-employed individuals benefit from enhanced financial independence, including diversifying income, leveraging tax deductions, and pursuing passion projects. This leads to increased job fulfilment and potential earnings.

1. Freedom to Be Your Boss

Running your own business as a sole trader comes with real independence. You’re in charge – choosing your projects, making all the decisions, and answering to no one but yourself.

This level of control is incredibly empowering. It also opens the door to creative freedom. Without the constraints of a traditional job, you can try new ideas, experiment with different approaches, and solve problems uniquely.

2. Flexible Working Hours

For a business owner, having flexible working hours is a hallmark, as it provides time management that is seldom found in traditional jobs. Self-employed people can set their own work schedule, balancing work and personal activities. This flexibility allows you to work during your peak productivity times, whether a morning person or a night owl.

Creating your own schedule also helps manage personal commitments. For instance, parents can align work hours with school runs and family time. This adaptability is especially useful for managing varying daily responsibilities, helping to maintain a healthy work-life balance.

Flexibility isn’t just about working fewer hours or taking more breaks. It also means you can extend your hours to meet deadlines or take on extra projects, boosting your income. This dynamic approach allows self-employed individuals to tailor their hours to align with their lifestyle preferences perfectly.

3. Enhanced Job Satisfaction

Job satisfaction is vital in any career, and self-employment often excels. One reason is the direct rewards of your efforts. Self-employment allows you to directly reap the benefits of your hard work, which can be incredibly fulfilling.

Making your own decisions and having complete creative control over projects fosters a sense of power and satisfaction and can reduce the stress of working for a company.

Additionally, self-employment offers the chance to pursue passion projects. Aligning your work with your interests leads to greater job fulfilment and satisfaction. This alignment boosts mental well-being and enhances overall work life, making each day more enjoyable and rewarding.

4. Financial Independence and Earnings Potential

Financial independence is another strong reason to consider self-employment. Unlike traditional jobs with fixed salaries, self-employment lets you adjust your rates and workload, directly influencing your financial goals. This control over earnings progression allows you to build wealth independently without relying on an employer for job security.

Many self-employed people diversify their income through various services and product offerings. This boosts their earning potential and provides a safety net during economic downturns.

5. Tax Benefits and Deductions

Self-employed people can take advantage of various tax benefits and deductions, significantly reducing their overall tax burden. For example, they can claim deductions for office costs, advertising, marketing, and travel expenses. Deducting business expenses from taxable income can lead to substantial savings.

Self-employed people can also claim back proportional costs of mortgage payments, utilities, and council tax related to home office use or use the simplified expenses.

These tax benefits make self-employment both financially rewarding and fiscally efficient.

6. Personal and Professional Growth

Running your own business provides numerous opportunities for personal and professional growth. A key advantage is the variety of projects you can undertake, enhancing your skills and experience across multiple domains. This diversity helps develop a broad skill set, making you more adaptable and versatile.

Running a business also offers the chance to develop leadership and organisational skills. Managing various aspects of a company, from marketing to client relations, equips you with valuable experience for the future. This hands-on learning approach is often more effective than traditional training programs, fostering a deeper understanding of what business means regarding operations.

Entrepreneurs often gain a deeper understanding of their market and customer needs through diverse project involvement. This knowledge aids business growth and enhances their ability to respond to market changes and customer demands, making them more effective and successful.

7. Building a Brand and Reputation for Your Own Business

Building a business brand is essential for long-term self-employment success. A strong brand can enhance client loyalty, customer experiences, and reputation.

Networking is vital for building your brand. Connecting with other professionals and potential clients reinforces your brand reputation and opens new projects and collaboration opportunities.

Customising your career path to align with your goals and values attracts loyal clients who resonate with your brand.

8. Work-Life Balance

A highly appealing aspect of self-employment is the potential for a better work-life balance. Self-employed individuals can tailor their schedules to balance work demands with personal life, enhancing their quality of life. This flexibility creates more time for family, hobbies, and personal interests, boosting happiness and fulfilment.

A business owner needs to manage this flexibility wisely. The intense commitment to self-employment can sometimes become an obsession, so balancing career aspirations with personal life is essential.

A customised work environment enhances mental well-being, a significant benefit of self-employment. Creating a work environment that suits your needs and preferences also improves productivity and comfort, contributing to a balanced and fulfilling work life.

9. Control Over the Work Environment

Control over your work environment is another significant benefit of self-employment. Unlike traditional jobs, which may confine you to a specific office setting, self-employed individuals can choose where they work. This flexibility allows for a more personalised work approach, whether working from home, a rented office, or other settings.

Dictating your working conditions can increase productivity and comfort. Setting up your workspace to suit your preferences can enhance focus and efficiency. This control over your surroundings leads to a more enjoyable and productive work experience.

10. Networking Opportunities

Self-employed individuals have lots of networking opportunities. Building a broad network increases the likelihood of discovering new projects and career opportunities. Online networking has become vital, enabling self-employed individuals to connect without geographic limitations.

Attending networking events enhances communication skills and builds confidence, which is essential for fostering beneficial relationships. These connections can lead to referrals and additional income, making networking crucial for self-employment.

11. Customising Career Path

Self-employment uniquely allows you to customise your career path. This flexibility lets you choose projects and clients that align with your aspirations and values, leading to a more tailored work experience. It also reduces office-related stress and creates a focused work environment.

Self-employed people can also adapt their career plans in response to changing market conditions and personal circumstances. This adaptability keeps one’s career path aligned with one’s goals and lifestyle, providing autonomy and control over one’s professional journey.

Useful Resources for a Sole Trader

Bookkeeping for self-employed

Free Excel templates for self-employed – includes our popular cash book and claiming home office expenses.

What are the Disadvantages?

While being your own boss has many advantages, there are also some disadvantages, including:

10 Disadvantages of Being Self-Employed

1. Less Job Security: Unlike employed workers, self-employed individuals don’t have the security of a steady paycheck, making financial planning more challenging.
2. Irregular Income: Income can be unpredictable, with fluctuating earnings depending on the volume of work and client payments.
3. No Employee Benefits: Working for yourself means you do not receive traditional benefits such as sick pay, annual leave, and employer pension contributions.
4. Responsibility for Taxes: Managing and filing tax returns is the responsibility of the self-employed, requiring careful financial tracking and planning. You will need to pay your national insurance contributions and tax.
5. Increased Workload: Running your own business often means handling all aspects of the operation, leading to long hours and more administrative work. You may also have to learn new skills in running a business.
6. Isolation: Working independently can lead to feelings of isolation, as there is less daily interaction than working in an office environment.
7. Financial Risks: Starting and maintaining a business involves financial risks, including initial investments and ongoing business expenses like rent and office costs.
8. Limited Access to Credit: Due to irregular income patterns, self-employed individuals may have challenges securing loans or credit.
9. Balancing Working Hours: The flexibility of self-employment can sometimes blur the lines between work and personal life, making it difficult to disconnect.
10. Need for Self-Motivation: Without a structured environment, self-employed individuals must stay motivated and disciplined to ensure consistent productivity.

Frequently Asked Questions

Is it financially better to be self-employed?

Being self-employed can be financially advantageous, as it allows for greater income potential without the limitations of a fixed salary. However, it’s essential to consider the financial risks involved in starting your own business and having less job security.

What are the advantages and disadvantages of self-employment?

Self-employment offers excellent freedom and potential job satisfaction, but it also comes with unpredictability and a lack of traditional employee benefits. Balancing these pros and cons is essential for making an informed decision.

What are the Financial Risks Associated with Self-Employment?

Self-employment carries financial risks, such as the absence of a guaranteed income and the responsibility of managing your own taxes and benefits. While it can lead to higher earnings, preparing for these uncertainties is essential to ensure financial stability.

What types of tax deductions can self-employed individuals claim?

Self-employed individuals can claim tax deductions for using their home office, advertising, marketing, travel expenses, and general business expenses. These deductions can significantly reduce taxable income and help manage business costs effectively.

How can self-employed individuals maintain a work-life balance?

Self-employed individuals can maintain a work-life balance by tailoring their schedules to meet work demands and personal life activities. Managing flexibility wisely is crucial to prevent feeling overwhelmed.

Summary of the Benefits of Self-Employment

Self-employment has many benefits, such as freedom, flexibility, job satisfaction, financial independence, tax advantages, personal and professional growth, brand development, work-life balance, control over the work environment, networking opportunities, and the ability to customise career paths.

The post 11 Benefits of Self-Employment appeared first on Business Accounting Basics.

It can sometimes feel like a frustrating hurdle, especially when dealing with fluctuating income or complex paperwork. But don’t worry! This article will guide you through the essential documents and strategies to effectively prove your income as a self-employed person in the UK. We’ll cover everything from tax returns and bank statements to helpful tips for staying organised and presenting a strong financial profile.

What is Proof of Self-Employment Income?

First, let’s explore why you might need to provide proof of your self-employment income:

• Mortgages: Lenders need to assess your ability to repay a mortgage.
• Loans: Banks and other financial institutions require proof of income for business or personal loan applications.
• Renting: Landlords often request proof of income to ensure you can afford the rent.
• Benefits: Certain benefits or financial assistance, such as Universal Credit or Housing Benefit, may require proof of income to determine eligibility.
• Legal Proceedings: Proof of income may be necessary in child support cases or other legal matters.
• Insurance: Some insurance policies may require proof of income to assess risk.
• Immigration: If you’re applying for a visa or residency, you might need proof of income to demonstrate your ability to support yourself.

Remember that self-employment requires you to pay income tax and national insurance yourself. Ensure you have sufficient funds when calculating repayments.

What Income Documents Can I Provide?

As a self-employed individual, proving your income often requires gathering official documents demonstrating your earnings. Here are some of the key documents you might use:

Self-Assessment Tax Return

If you’re self-employed (either as a sole trader or in a partnership), you’ll file a Self-Assessment tax return with HM Revenue and Customs (HMRC) each year. This tax return provides a comprehensive overview of your self-employment income and expenses. It includes details like your total turnover, allowable expenses, and net profit for the tax year. Lenders and other entities often request your tax return (SA302 form) as primary evidence of your income.

Bank Statements

Your bank statements are evidence of your income and expenditure. They show the money coming into your account from customers and your business expenses going out. When providing statements as proof of income, you’ll typically need to provide for the last 3 to 6 months. It’s generally advisable to use business bank statements if you have them, as they give a clearer picture of your self-employment income and keep your personal and business finances separate.

Invoices and Contracts

If you invoice clients for your services, keeping records of them and their corresponding payments can be proof of income. This is especially helpful for freelancers or contractors with project-based income. These records demonstrate the actual payments received for your work.

You can also use contracts or agreements for ongoing work or retainers to support your income claims. They show you have a client commitment for a certain amount of work or income over a specified period.

Profit and Loss Report

A Profit and Loss statement (an income statement) summarises your self-employment income and expenses over a specific period. It shows your total revenue, the costs of running your business, and the profit or loss. P&L statements are beneficial when applying for larger loans or mortgages, as they give a more detailed picture of your business’s financial performance.

Confirmation by a Professional Accountancy Business

Sometimes, a signed letter from a professional accountancy business can further verify your income. These letters can confirm your earnings, the nature of your work, and the length of your business relationship.

Remember, the documents required may vary depending on the situation and the entity requesting proof of income. It’s always best to check with the relevant organisation or lender to confirm their specific requirements.

If you are self-employed and employed, you must provide proof of income for both, including a P60 or payslips showing gross and net pay.

How to Stay Up to Date with Proof of Income

Staying on top of your income records is crucial for self-employment, not just when you need to provide proof of income. It simplifies tax filing, helps you understand your business’s financial health, and makes it much easier to access financial products or assistance when needed. Here’s how to keep your proof of income documents organised and current:

1. Maintain Organised Records

• Use Bookkeeping Tools: Utilise Excel bookkeeping templates or dedicated accounting software to track your income and expenses for your tax return. We provide a free Cash Book template to record your income and expenses.  
• Keep Detailed Records: Keep copies of all invoices, receipts, and bank statements. This ensures you have a clear record of every transaction.  
• Separate Personal and Business Finances: Open a separate business bank account to distinguish between personal and business-related income and expenses easily.  

2. Use Accounting Software or Hire an Accountant

• Accounting Software: Consider using accounting software like Xero or QuickBooks, which can automate many bookkeeping tasks, categorise expenses, and generate financial reports ready for your tax return.  
• Professional Assistance: If your business is more complex or you prefer to delegate this task, hiring an accountant or bookkeeper can ensure the accuracy of your records. They can also provide valuable advice on tax planning and financial management. 

3. Stay on Top of Tax Obligations

• File Taxes on Time: File your Self-assessment tax return annually and on time to avoid penalties and keep your tax affairs in order. This also ensures you have access to tax return documents when needed.
• Keep Records for the Required Period: HMRC requires self-employed individuals to keep their records for at least 5 years after the 31 January submission deadline of the relevant tax year. Ensure you have a system for storing and accessing these records.  

By following these tips, you can maintain accurate and accessible proof of income records, simplifying the navigation of financial applications and demonstrating your earnings whenever necessary.

Self-Employed Proof of Income Conclusion

Providing proof of self-employed income in the UK may seem daunting, but it becomes manageable with the proper preparation and documentation.

As a self-employed person you can demonstrate financial stability by maintaining organised financial records, using accounting software, and understanding key documents like the annual tax return, bank statements, and profit and loss reports. Having up-to-date and comprehensive income documents is essential for applying for a loan, securing a mortgage, or fulfilling legal requirements. By following the strategies outlined in this guide, you can confidently prove your self-employment income whenever necessary.

The post Proof of Income for Self-Employed appeared first on Business Accounting Basics.

The good news is that if you’re self-employed, you will continue to benefit from lower NICs. 

Since April 2024, you will no longer have been required to pay Class 2 National Insurance.

Whether you’re a sole trader or own a business, Business Accounting Basics wants to make the process easier. Our solutions include a Tax Calculator that is quick and easy to use. We also offer a range of other tools to help you stay on top of your tax. 

Key Deadlines for the Tax Year

The UK tax year runs from 6 April to 5 April the following year. Dates to write on your calendar include:

• 5 October. This is the time to register for self-assessment if you’re new to filing.
• 31 October. You must submit paper tax returns for the previous tax year.
• 31 January. You should have filed online tax returns and paid any tax owed for the previous tax year.

Failing to meet these deadlines can result in unwanted penalties. For instance, a late filing can lead to an initial £100 penalty. 

Why Self-Assessment Can Be Complex

Even a small mistake in your tax return can lead to paying too much tax or penalties. One of the most common issues is keeping accurate records of income and expenses. Business Accounting Basics make this process much easier with expert advice on bookkeeping. We regularly support small businesses who do their own bookkeeping or use accounting services.

Ultimately, we can make the process much less stressful and time consuming. If you’re self employed, the last thing you want is to be worrying about tax over Christmas. 

Why Choose Us to Help with Self-Assessment?

We provide many resources for individuals and businesses navigating the complexities of tax and self-assessment. Our advice comes from a team with a deep understanding of HMRC requirements. 

Business Accounting Basics stays up-to-date with changes in tax law, ensuring our tools are useful and convenient. 

Advice Tailored to your Needs

At Business Accounting Basics, we recognise that every individual and business is unique. We take the time to get to know your circumstances. 

Save Time this Season

Filing your self-assessment tax return can take hours. It’s especially time consuming if you’re

unfamiliar with HMRC’s processes. 

With our helpful tools, you can save valuable time and focus on what matters most—whether that’s growing your business or enjoying time with family and friends. 

Accurate Record-Keeping

Quality record-keeping is essential for filing accurate returns and defending against potential HMRC audits. With our expert advice and tools, you can reduce the risk of errors and have everything you need for a smooth filing process.

Reduce Stress During the Process

Navigating tax laws can be daunting. It’s particularly pressurised if you worry about penalties or audits looming. Our advice can make the self-assessment process easier, ensuring you feel confident in the process. 

Make the Most of our Digital Tools and Support

We offer the latest accounting software to streamline your self-assessment process. Our team is always happy to provide information on the latest tax changes which affect your circumstances, whether you run a small business or work freelance. 

Why Accuracy Matters in Self-Assessment

Accuracy is crucial when filing a self-assessment tax return. Mistakes can lead to:

• Overpayment: Missing out on deductions or allowances.
• Underpayment: Leading to penalties and interest charges.
• Scrutiny from the HMRC: Triggering audits or investigations.

By choosing Business Accounting Basics, you will have excellent resources to make tax less ‘taxing’. All our resources are free, easy to understand and practical. They’re created by a team with years of experience and with over 350,000 templates available, it’s easier to simplify the accounting process. 

We offer plenty of advice for self-employed individuals and freelancers. For instance, it helps to separate personal and business accounts to avoid confusion. Invoicing regularly can help you maintain your cash flow, and means you can keep records of income and expenses.

Additional Support from Business Accounting Basics

Beyond self-assessment, we offer advice on many different topics, including:

• Bookkeeping: Keeping your financial records organised and up-to-date.
• VAT Returns: Managing your Value Added Tax obligations.
• Payroll Services: Ensuring your staff are paid accurately and on time.
• Business Advice: Providing strategic insights to help your business grow.

Whether you’re filing your first return or dealing with a complicated tax situation, our website can prove to be invaluable. Choose us to advise on your self-assessment journey and you can proceed with ease and confidence. We have a comprehensive guide for anyone self-employed, including free bookkeeping templates. 

Read our latest blog on self employment and tax. 

The post Self Employed and Need Help Dealing with Tax? appeared first on Business Accounting Basics.

This article includes the essentials of tax thresholds, how to report your earnings, and methods to minimise what you owe legally. Prepare to tackle tax season confidently, armed with the knowledge to keep your side hustle financially sound.

Key Takeaways

• If your side hustle earnings exceed £1,000 in the UK, you’ll need to pay tax on the profit, so keep detailed records to determine your tax liability correctly.
• You must choose between claiming the tax-free trading allowance and deducting expenses when calculating your tax, and if you earn enough, register for tax as a side hustler by 5th October following the relevant tax year.
• Accounting for multiple streams of income, allowable expenses, and managing potential tax benefits can be complex; dedicated accounting software can help streamline financial management and ensure compliance.

What has changed in Side Hustle Tax?

Nothing has changed. The rule has always been that income tax is paid for earnings over £1000 for any side hustle. The change that has come. The reality is that there hasn’t been a change in the side hustle tax threshold; it remains at £1000.

However, there has been a significant change in the responsibility of digital platforms such as eBay, Etsy, Vinted, and Airbnb. These platforms must now report online sellers’ information to HMRC.

Platforms are required to gather specific seller details, such as accurate identification and location, along with earnings on the platform over a year. This information is also shared with the sellers themselves.

This new shift in responsibility aims to ensure that all side hustle income is accurately reported and taxed, keeping everyone on a fair playing field.

Deciphering Side Hustle Tax: What You Need to Know

A side hustle is like your secret financial weapon – a little extra business that brings in some extra income. From selling second-hand clothes on online platforms to doing freelance work on sites like Fiverr or Etsy, the possibilities are endless. But did you know that you need to pay tax on the money you make from these activities if you’re making a profit over £1000? That’s right, the tax authorities want a slice of your hustle pie!

Don’t worry; maintaining detailed records of your income and expenses can streamline this process. This will assist you in determining your tax liability and ensuring compliance with tax regulations. After all, you wouldn’t want to get on the wrong side of the taxman, would you?

The Threshold for Taxation on Side Income

Are you aware you can earn up to £1,000 in the UK tax-free from your side hustle? This measure is in place to tackle tax evasion and makes it easier for people to start side hustles without worrying about taxes. If you have property income and trading, you can use £1,000 for each business type.

However, if you make more than the tax-free earnings of £1,000 from your side hustle, you’ll have to pay tax on the earnings. Side hustlers can only use the trading allowance of £1000 or claim expenses against their tax bill. Considering the best option for your specific situation is crucial. You can’t use both. So, don’t forget to factor this in when you’re counting your side hustle earnings!

Registering for Tax as a Side Hustler

Now that you’re generating significant income from your side hustle, how should you proceed with tax registration? Here are the steps you need to follow:

1. Decide whether you want to operate as a sole trader or a limited company. Each has its own set of tax implications. Most are self-employed and register for the self-assessment tax return.
2. Familiarise yourself with the tax registration guidelines set by HMRC.
3. Adhere to the guidelines correctly to ensure proper tax registration.

The tax registration process for a side hustler is relatively straightforward. Here are the steps to follow:

1. Sign up as self-employed on the self-assessment website and submit your details; see further details below.
2. Wait for the activation codes to arrive in the mail.
3. Remember, you must register for tax by 5th October in the next tax year after starting your side hustle.
4. HMRC will keep sending you tax returns every year unless you tell them to stop, so keep track of your tax obligations!
5. When you complete a self-assessment tax return, you will know how much tax to pay and the dates of when to pay tax.

Choosing Your Business Structure

Selecting the appropriate business structure for your side hustle is a crucial step. You can opt for a sole trader, partnership, or limited company. Each setup has its own tax implications, and the right choice depends on your circumstances.

Let’s say you decide to run your side hustle as a sole trader. In this case, you’ll only have to worry about paying tax on the profits. But if you decide to run it as a limited company, the profits will be subject to corporation taxes, although there are advantages for dividends. So, you’ll need to weigh the pros and cons of each setup before making a decision.

Completing Your Self-Assessment Tax Return

Fulfilling your self-assessment tax return is vital to your tax responsibilities as a side hustler. This process involves letting the HMRC know about your income and expenses, and it’s essential to get it right to avoid penalties.

To complete your self-assessment tax return, you’ll need to follow these steps:

1. Sign up as self-employed with HMRC. You must do this by 5th October following the tax year you started. For example, if you started trading in the 22/23 tax year, you must register as self-employed by 5th October 2023.
2. Gather all your financial documents like bank statements, pension contributions, interest received, invoices, and receipts for your expenses.
3. Ensure you have your Unique Taxpayer Reference (UTR) and National Insurance number, and if you have a regular job, your employer references number, P60 and P11D.

Remember, submitting your self-assessment tax return by midnight on 31st January after the end of the tax year you’re reporting for is crucial. You will also need to pay the tax that you owe by 31st January, and if there are large profits, you will have to pay an advance payment for the following tax year.

HMRC gives several options for paying taxes, direct debit, debit or credit card, online banking, phone HMRC, or setting up a payment plan. Don’t be late; the taxman waits for no one!

Calculating Your Side Hustle Tax Obligation

Determining the amount of tax you owe for your side hustle can be likened to solving a puzzle. But don’t worry, we’ve got you covered. To calculate your tax obligation, consider your allowable expenses and all your income sources.

Allowable expenses for your side hustle can include:

• Office Supplies
• Use of home office
• Travel
• Phone bills
• Other running costs

By subtracting these expenses from your total income according to the actual tax rules, you will only be paying tax on what you’re making, which is a great way to reduce your tax bill.

How much tax you pay will depend on your personal allowance, the profits and any other income you receive, like employment income. To calculate your income tax bill, use our self-employed tax calculator.

Understanding Allowable Expenses

Let’s explore allowable expenses further. These are expenses related to your business that you can deduct from your income when calculating your taxable profit. Essentially, these are your business costs that are necessary and directly related to your side hustle.

So what counts as allowable expenses? Well, if you’re running your side hustle from home, you might be able to write off some of your bills, including:

• Heating, electricity, and water bills
• Council Tax
• mortgage interest or rent
• broadband and phone usage

You can use a flat-rate simplified expenses method to calculate these deductions, making your tax calculation process easier. Remember, if you use something for work and personal stuff, you can only claim the business part of the expense.

Read our comprehensive guide on claiming business expenses to determine what you can claim.

Navigating Multiple Income Streams

Tax calculation can be slightly more intricate for those juggling multiple income streams. You need to include all your income when calculating your taxes, and after taking out any allowances or reliefs, HMRC will tax whatever’s left.

In the case of different income sources like dividends or rent, these could have their tax rates separate from income tax. For example, dividends are taxed at a lower 8.75% rate. So, when filling out your tax forms, make sure to report the different types of taxable income correctly to avoid any unnecessary complications.

The Digital Age: Online Sellers and Tax Rules

In the digital era, online platforms must report user income to tax authorities.

This new rule is designed to ensure accurate taxation for online sellers, taking into account their respective income tax band. So, if you’re selling items or offering services online, this rule applies to you.

From 1 January 2024, online platforms must track how much money people make and pass this information on to HMRC. Then, the taxman will look into it and chase up any unpaid taxes if needed.

This initiative will not affect you if you already pay income tax on earnings from your side hustle. You will not experience any impact from this initiative if you pay tax on your earnings. But staying informed about these changes is always good to ensure you comply with the tax rules.

Preventing Side Hustle Tax Evasion: Your Responsibilities

As a side hustler, it’s your responsibility to prevent tax evasion by reporting your income and expenses accurately to tax authorities. This might seem daunting, but with the right knowledge and preparation, you can navigate your tax obligations like a pro.

Common mistakes to avoid include:

• Not getting professional help when needed
• Not keeping accurate records
• Ignoring cash flow
• Not budgeting for the tax bill
• Dealing with cash transactions

So, stay organised, keep good track of your money, stay updated on tax laws, and follow the rules. After all, the consequences of avoiding tax can be severe, with penalties.

National Insurance: How It Relates to Your Side Hustle

National Insurance represents another significant facet of taxation for side hustlers. It’s a system in the UK that provides certain state benefits. But how does it relate to your side hustle?

If you are a side hustler, you may need to pay National Insurance if your earnings are considered trading income. If you’re making £12,570 or more yearly, you must pay Class 2 and Class 4 NI rates. However, if your profits are below £6,725, you won’t need to worry about Class 2. From April 2024, class 4 NI is abolished.

Different business structures, like sole traders and limited companies, have their own National Insurance contributions and rates, so consider this when choosing your business structure.

Side Hustle Tax Benefits and Relief

Now, let’s focus on the positives – tax benefits and relief. Yes, they do exist! You can take advantage of several tax breaks and allowances as a side hustler.

For instance, the £1,000 trading allowance allows you to sell up to £1,000 yearly from your side hustle without paying taxes. Also, you can claim all allowable expenses related to your side hustle activities, decreasing your taxable profit and potentially lowering your tax bill. So, please keep track of these benefits and maximise them!

Consequences of Non-Compliance of Paying Tax

So, what are the consequences of non-compliance with tax regulations? Well, let’s say it’s not a pretty picture. If you forget to file your tax return for your side hustle income, you might get hit with a fine of £100 or a daily fine of £10 for up to 90 days if it’s three months late, or a penalty of the higher of £300 or 5% of the tax due if it’s even later.

Failing to comply with tax regulations can also result in interest charges from HMRC. In the worst-case scenario, the consequences of avoid paying tax in the UK can include:

• Fines
• Interest charges
• Legal action
• Imprisonment of up to 14 years

The maximum penalty for tax evasion in the UK can be as high as 200% of the tax owed. Therefore, it’s crucial to stay on top of your tax obligations and ensure you comply with all relevant tax laws.

Tools and Resources for Side Hustlers

Specific tools and resources can simplify the calculation of your taxable income from your side hustle finances. These include accounting software and financial templates that can help you keep track of your income and expenses.

Some recommended accounting software for side hustlers include QuickBooks Online, Xero, and FreeAgent. These platforms offer features ideal for small businesses and can save up to 8 hours a month. Many accounting software programs have tools enabling you to upload transactions, saving time.

Using Excel spreadsheets is another option. We offer a free cash book template to enter all your transactions for the year and will produce a profit and loss account to calculate your self-employed taxable income.

It is also worth having a separate business bank account; this will help ensure you keep the business and private transactions separate and claim for all expenses.

Summary

In conclusion, understanding your side hustle tax is essential to running your side hustle effectively and legally. There’s much to consider, from registering for tax and choosing the right business structure to understand allowable expenses and navigating multiple income streams.

With the right knowledge and tools, you can confidently navigate the world of side hustle taxation. So, why wait? Start your side hustle journey today and make your hard work pay off in the best possible way!

Frequently Asked Questions

Do I need to pay tax on a side hustle?

If you have a side hustle, you may need to pay tax on your earnings, especially if you sell items online or rent out space. Platforms like eBay and Airbnb will report your income to the tax authorities, so you must know your tax obligations.

What are the new side hustle rules for HMRC?

The new rules require digital platform operators to collect and verify information about ‘side hustle’ earners who use their online marketplaces, and anyone earning over £1,000 a year through their trading must pay income tax on these earnings.

Can you earn 1000 tax-free?

Yes, if your self-employed income is £1,000 or less, you do not need to tell HMRC or file a tax return, making it tax-free. So, you can earn £1,000 tax-free if you are self-employed.

How do I register for side hussle tax?

You can register for tax as a side hustler by operating as a sole trader or a limited company and signing up as self-employed on the self-assessment website. It’s a straightforward process that can be done online.

The post Understanding Your Side Hustle Tax UK: Navigating Extra Income Tax appeared first on Business Accounting Basics.

When filing your tax return, there are several things to consider. You must accurately report your income and any expenses incurred during the year. This includes wages, pensions and income from investments and other sources. You must also declare any deductions taken against your taxable profits and calculate how much capital gains tax is due on any investments you have sold.

This article will outline the different aspects of completing a tax return for self-employed individuals, whether you are a sole trader or in a partnership. We’ll explain what information you need to provide, how you can calculate your taxable profits and the different ways of paying tax.

Who Needs to Complete Self-assessment Tax returns?

You must complete a return if you are self-employed as a sole trader and have earned more than £1000 before taking off any deductions.

This also applies to landlords renting out a property, people with untaxed income such as tips or foreign income, or those with investment and savings income that is not already taxed at source.

If you are in a partnership, you must complete an SA800 tax return and a self-assessment tax return SA100.

Self Assessment and MTD

The government is introducing a tax system called making tax digital (MTD). This means that self-employed individuals and landlords must keep digital records of their business transactions. These records can then be used quarterly to submit taxes through an approved software solution.

The introduction dates are from 6th April 2026 with an income over £50,000 and April 2027 with an income over £30,000. The income includes both business and property.

Can I Complete my Own Tax Return?

Yes, you can complete your own tax return as long as you are confident in correctly understanding the information and how to report it. However, if you have any doubts or concerns, it is advisable to seek professional advice from accountancy membership organisations UK.

An accountant can provide expert advice on tax planning strategies that may save you money and ensure that all deductions and allowances are claimed, which may reduce the amount of tax due. They will also be able to keep track of all changes in legislation so that your returns are updated accordingly.

Tax Return Software

There are several providers of tax return software which make completing a tax return simpler and more efficient. The software will guide you through entering your financial information, calculating the amount of your tax bill, and then generating a completed return for you to submit to HMRC.

The software is generally very user-friendly and allows you to enter information at your own pace. It will also provide information on deductions and allowances to which you may be entitled, which can reduce the amount of tax due on your return.

In the future, most accounting software packages will include the feature to submit tax returns under Marking Tax Digital.

How to Register for a Self-Assessment Tax Return

To register for self-assessment, you will need to sign up with HMRC and get a government user ID. You will then be sent a 10-digit Unique Taxpayer Reference (UTR) number, which must be kept safe and used when filing a tax return. If you can’t sign up online, you can phone them.

Once registered, you will receive an annual tax return form to complete online. This will detail your income and deductions for the past year alongside any other information HMRC need to calculate the amount of tax you owe.

It is essential to ensure all information on your tax return is accurate, as any mistakes can lead to an investigation and potential fines.

What is the self-employment tax Year?

The self-employed tax year runs from 6th April to 5th April the following year. Any income earned between these dates must be reported on your tax return.

The deadline for filing a paper self-assessment tax return is 31st October, or if you file online, it is by midnight on 31st January following the tax year end.

How to Complete a Self-Employed Tax Return

Gather all the Information for the tax year

The process for completing a self-employed tax return is straightforward. Firstly, you will need to gather all the information required by HMRC, including the following:

• Self-employed income and expenses
• Rent received
• Employment income
• Income from overseas
• Pensions payments and income, including any state pension
• Certain benefits income if it is taxable
• Investments
• Gift Aid donations
• Capital gains or losses from selling assets
• Student Loans

Check your Personal Details

The next stage is to check your personal details, including name, address, National Insurance Number and date of birth. If any details are incorrect, you can change them now.

Complete the Sections that Apply to You

When completing the Self-Assessment Tax return online, it will guide you through the complete process. You start by deciding which sections are relevant to you.

The process will then guide you to complete each section that is needed.

Tax Calculation

Once you have completed all the required sections, HMRC’s online system will calculate your self-assessment tax return. It will also provide a breakdown of your tax credits, deductions and allowances.

Submit Your Return

Once you have carefully checked the correct details and all information has been included, you can submit your self-assessment tax return. This is usually done by submitting the completed form online via HMRC’s secure website.

Keep Records

It is vital to keep a copy of your tax return, as you may need it in the future for reference. HMRC may also request copies of any relevant information when conducting an audit.

You will also need to keep all the records that relate to your tax return for at least five years after the 31st January submission date. The records include bank statements, invoices, bills, bank interest statements, pension records, and other related paperwork.

How to Calculate Self-Employed Income and Expenses

Calculating your income and expenses can initially seem daunting if you’re self-employed. However, with the help of your bank statements, invoices, and any other relevant documents you may have, it doesn’t have to be as difficult as you might think.

Bank statements will show any money entering and leaving your accounts – this is the easiest way to determine how much money you have made during a period. Make sure to keep a record of invoices sent out for work done so that they can be counted towards your income.

Track all your business-related allowable expenses, such as payments for goods, services, utilities and supplies.

On the tax return, there are two ways to record the business’s expenses; if the turnover is below £90,000 from 2024, you can enter the total expenses. For turnover above £90,000, you are required to enter the individual expense amount.

These records will help produce an income and expenses report and a balance sheet. These figures are used in your self-assessment tax return. There are several different ways to record the transactions for the tax year, including:

Accounting Software

Using accounting software such as Xero, FreshBooks, Sage, or QuickBooks will help you keep up with your self-assessment tax return. These packages usually come with inbuilt features and services that allow you to track income, expenses and payments easily.

They include features that make it easier to record transactions and run your business, including:

• Importing bank transactions
• Reconciling accounts
• Producing accurate reports
• Receive payments online
• Professional Invoices
• Tracking stock
• Calculating wages

Excel Bookkeeping Templates

For those not comfortable using accounting software, it is possible to use an excel bookkeeping template. This will allow you to record income and expenses using a spreadsheet. It may be helpful for small businesses or freelancers with low turnover.

At Business Accounting Basics, we have produced over 25 free bookkeeping templates to assist with different accounting aspects like cash book, profit and loss, accounts receivable, sales invoices and lots more.

Ledger Book

For those who prefer a more traditional approach, you can record your transactions using a ledger book. This involves entering all transactions into the appropriate columns and sub-divisions. It is essential to keep the ledger book up to date so that it remains accurate.

Once all entries have been recorded at the end of the tax year, your ledger book should be able to produce an income and expenses report. This will provide the information needed for the completion of the self-assessment tax return.

If you’re unsure how to calculate your self-employed income or expenses for a tax return, it is recommended that you seek professional advice from an accountant.

How much Tax do I have to Pay?

Once your self-assessment tax return has been received and processed, you will receive a statement of how much tax and National Insurance is due or if there is a refund due to overpayment.

To check your payments due, sign into and view your account. It will show a breakdown of payment amounts and dates.

Income Tax Rates for Self Employed

The tax you will pay depends on the total income for that particular year. Income tax rates are set by HMRC and are applied to different levels of taxable income.

For the 2023/2024 financial tax year, the self-employed tax rates for single :

Personal allowance up to £12,570 is tax-free.

£12,571 to £50,270 is 20%, the basic rate of tax.

£50,271 to £150,000 is 40%, the higher rate of tax.

Over £150,00 is 45%, called the additional rate. it will be lowered to £125,140 from 6th April 2023.

If you earn over £125,140, you will not receive a personal allowance. For earnings over £100,000, for every £2 earnt, £1 will be withdrawn from the personal allowance.

Class 2 National Insurance Contributions

Class 2 NI is paid if profits are more than £12,570 for the tax year 2022/2023 and are calculated at £3.45 per week.

Class 4 National Insurance Contributions

Class 4 NI is paid if profits are £12,570 or more a year. There are two different rates:

9% on profits between £12570 and £50,270

2% on profits over £50,270

Self Assessment Tax Calculator

You can use the online self-assessment tax calculator to check how much tax and NI you may be liable to pay for the tax year. This will give you an estimate of your tax liability based on the information you enter. The tax calculator is only suitable for calculating self-employed income; it does not include income from other sources.

This tax calculator works on Self-employed only up to £100,000.

What are Payments on Account?

Payments on the account are payments of estimated tax due based on the previous tax year before submitting your self-assessment tax return. You will have to make a payment on account if your previous tax bill was over £1,000.

Payments on Account are 50% of the previous year’s tax bill; the first payment is due by 31st January, and the second payment is due by 31st July.

Self Employment Tax Deadlines

As self-employed, there are several tax deadlines that you must be aware of.

If you are newly self-employed, you must register for self-assessment by 5th October on your second trading tax year. For example, if you started self-employment In June 2022, you must register by 5th October 2023.

31st January is the deadline for submitting your self-assessment tax return and making any payments on account and final payments.

31st July payment on account for the tax year.

If you have missed these deadlines, it is important to contact HMRC as soon as possible to inform

How do I pay my Self-Assessment Tax Bill?

There are several ways to pay your tax bill; whichever method you use, you will need to leave enough time for the payment to clear by the deadline. The options to pay tax are

• Online or telephone banking
• CHAPS
• Debit or credit card – there is an additional charge for using business credit cards
• At a bank or building society
• BACS
• Cheque by post
• Direct Debit

Once payment has been made for your tax bill, it is always worth checking it has been received by using your online account.

Budget Payment Plan

It is also possible to set up a weekly or monthly payment plan. To set up a payment plan, you must access your online account and follow the instructions to set up a direct debit.

Late Payments for your Tax Bill

If you fail to pay on time, HMRC will impose a late payment penalty. The penalty amount depends on how late the payment is; you will also be charged interest. If you cannot pay your full tax bill, contacting HMRC as soon as possible is important.

Self-Assessment Return Conclusion

Self-assessment tax can seem daunting and complicated, but you can easily manage your taxes with the right knowledge. Knowing when to register for self-assessment, how much income tax you’ll owe based on your total profits, understanding payments on account, and deadlines are all crucial steps in filing a successful self-assessment tax return.

With so many different ways of paying tax, such as online banking or direct debit, it’s easy to ensure everything is handled before the deadline.

Finally, if there are any problems related to filing or paying your taxes, don’t hesitate to contact HMRC for help – they have experienced advisors who can assist you quickly and efficiently.

Disclaimer

The content provided on this page is for informational purposes only and should not be considered tax advice. You should always speak to a qualified professional before making decisions concerning your Self-Assessment return.

The post Tax Returns for Self Employed appeared first on Business Accounting Basics.

In this blog post, we’ll explore just why record keeping is essential for self-employed people, explain how exactly to do it effectively, and discuss some handy tips when filing taxes. So if you’re overwhelmed by seemingly endless paperwork or want advice on accounting processes, read on!

Do I need a Separate Business Bank Account?

One of the biggest questions that sole traders and business partnerships ask is whether I need a separate bank account.

The answer is legally, you do not need to open a separate business bank account, but it is recommended. The reason for recommending it is that it keeps the business and personal records separate, making it easier to complete bookkeeping and helping to ensure that all the transactions are included in the self-assessment tax return.

One of the most significant advantages of having a separate account is saving time when you complete your accounts by knowing that all the transactions relate to the business. This process is made even quicker by using accounting software with bank feeds.

Can I Complete Accounting Myself or do I Need an Accounting Firm?

This is a big question and one that is up to individual preference. Some people find it helpful to use an accountancy firm as they can provide advice and assistance with the accounting process, ensuring that all the records are kept accurately and making sure you don’t miss any potential deductions.

On the other hand, some self-employed individuals like to complete their accounting themselves. This is perfectly acceptable and can be done with the help of various accounting software. If you decide to go down this route, ensure you understand all the regulations and filing requirements for self-employed people in the UK.

Record Keeping for Self-Employed – What Business Records should I Keep?

As a self-employed, you will have lots of paperwork, some of which you must keep to back up the accounting records for all the business income and expenses. These records include the following:

Bank Statements

These provide an accurate overview of all the transactions relating to your business for both income and expenditure. You will also need any credit card statements, paying in book and chequebook stubs.

Business Income

As self-employed, keeping all records relating to the business income is essential. You may have several different income sources, such as clients, online sales, cash sales and affiliate income. Keep all the invoices and records of all payments or deposits in your business bank account; this includes paying in slips, sales invoices, till rolls and all paperwork.

Business Expenses

These records should include all the business expenses you need to keep all the receipts for goods, stock and other expenses. They will help to ensure you are claiming all potential deductions.

Any expenses must be used solely for the business or claim the appropriate proportions, or HMRC will not accept them in a self-assessment tax return.

VAT Records

If you earn over the VAT threshold of £90,000, you must register for VAT unless you are exempt. You are then required to keep all VAT transactions and report them through the tax return software for making tax digital.

There are specific details that you must include in the sales invoice if you are VAT registered; this includes:

• a sequential number
• the time of the supply
• the date of issue of the document (if different to the time of supply)
• the name, address and VAT registration number
• the name and address of the customer
• a description of the goods or services supplied
• The amount of goods, the level of services, the sales tax, and the amount you need to pay, excluding sales tax.
• the total gross amount payable, excluding VAT
• the total amount of VAT chargeable
• the unit price

PAYE Records

If you are an employer and pay wages, you must keep records of all the payments made. You must remember to send a P60 for each employee at the end of each tax year and submit an annual return to HMRC detailing all PAYE amounts paid during the tax year. All this paperwork must be kept.

Personal Income Records

If you have any additional personal income, such as investments or other sources of income, keep all the relevant paperwork to prove how much was received and where it came from. This could include payslips, dividends, bank statements, interest income and P60s etc.

Any Business Grants

If you have taken any business grants, you must keep records of all the paperwork about this income. You may be liable for tax on these grants, so keep accurate records.

These are just some examples of business records that should be kept. Always ensure that your accounting system is up-to-date and in line with the latest HMRC regulations. This will ensure that your business complies with the law and that all records are in order. For more advice, seek professional help from an accountant or financial advisor.

Self-Assessment Tax Return

If you are self-employed and earning more than £1000 per year, you must complete a self-assessment tax return for each tax year. The tax year runs from 6th April to 5th April. The latest date to submit a tax return is 31st January the following year.

When you complete a tax return with HM Revenue and Customs, a calculation is made to let you know how much income tax and national insurance are due.

What is the best way to Keeping Business Records?

There are several options for keeping business records. The size of the business will depend on the system that you choose. We look at the best options for a self-employed business.

Paper-Based Business Records

Keeping accounting records paper-based can seem daunting, but with a little organisation and attention to detail, it’s not as complicated as it looks. By using filing systems such as folders and binders, you can easily stay on top of your records. Label each folder, so you know where to find the information when needed.

One of the biggest problems of paper-based is having storage space.

Cloud Storage

Cloud storage is becoming increasingly popular for accounting and finance departments. Storing documents in the cloud usually means that all your files are stored in one location, making them easily accessible from any device or computer. This also makes it easier to back up and share information with other people.

The advantage of cloud storage is that you don’t need physical storage space and can access your documents anywhere with an internet connection.

Accounting Software

Accounting software is one of the best ways to save time and money when keeping business records. It enables you to manage invoices, expenses, payments and more all in one place.

Sales invoices are issued within the software and emailed to clients. Paperwork for business expenses can either email to the software or use an additional package to scan them in and extract the information.

One of the most significant disadvantages of only using accounting software is that if you decide to change software and stop the subscription, you may lose access to the documents and have to continue to pay for two sets of software. An example is Xero. The business is archived, and you can only see the information by paying a monthly subscription.

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How Long do I Need to Keep Business Records For?

You will need to keep all the tax records for 5 years after the tax return deadline for the relevant tax year. For example, if you complete the 21-22 tax year, the return is due 31st January 2023. You will therefore need to keep the records at least until the end of January 2028.

Are there Penalties for inadequate record-keeping?

HMRC might decide to review your records; if they find you have inadequate business records, they can reassess the business and fine you. The fines range from £250 for a new business in the first year of trading to £3000 for a company that has deliberately destroyed records.

Record Keeping Conclusion

Record keeping is an essential part of running a business, and it’s vital to ensure that you keep records for the correct period as set out by HMRC. Not only will this help your business comply with regulations, but it also ensures that all financial information is kept up-to-date and accurate.

Cloud storage, accounting software or paper filing systems can all be used to store documents securely; however, each option has its advantages and disadvantages depending on how much data needs to be stored and accessed.

Lastly, inadequate record keeping could result in hefty fines from HMRC, so make sure you are aware of their requirements when setting up your system. If you are unsure, seek the help of a bookkeeper or accountant.

The post Record Keeping for Self-Employed appeared first on Business Accounting Basics.

However, there are also some disadvantages associated with running a business as a sole trader. In this article, we will explore both the advantages and disadvantages of being a sole trader and help you decide whether it’s the right choice for you.

Knowing the best business structure is hard; we also have a blog about limited companies, so you can get a good overview of both before you decide – advantages and disadvantages of a limited company.

What is a Sole Trader?

A sole trader is a type of business structure where a single individual owns and operates the entire business. The sole owner is personally responsible for all aspects of the business, ranging from financial obligations to customer service.

As a sole trader, you have control over all decisions regarding the business, and they can also hire contractors or employees as needed.

Sole Trader Advantages

1. Easy to Set Up

It really is straightforward to set up a sole trader business. You contact HMRC and register as self-employed. HMRC will provide a unique tax reference number and a self-assessment tax return each year.

You may also wish to look into what insurance is relevant for your work; it is sensible to usually get professional indemnity insurance. And check with the ICO (Information Commissioners Office) about whether you need to register and pay your data protection fee. These processes are straightforward, though.

2.  Cheaper to Setup

As above, there are few initial start-up costs, and as it is just you, there are no wages to worry about in the beginning and no real need to get an expensive logo or branding done. Limited Companies have to pay a fee to Companies House to register.

When you start, just start! Having a plan is great, but don’t overthink it. You can do all the social media account setups yourself and have a basic cloud accounting system; many have free or very affordable versions.

You usually don’t need a website or expensive top-of-the-range IT equipment. Obviously, it does depend on what you are going to be doing, as you may need specialist equipment to carry out a service!

3.  Full Control Over Everything

It is just you; you call the shots and make the decisions as a sole trader, with no directors to answer to, and no one to argue with about changing the marketing message or branding colours.

4. You Keep All the Profits

Unlike a limited company, the money is yours. You can take money out of the business and spend it on what you like. It is sensible to keep the account separate and make it clear when you transfer payments to yourself.

Ultimately, you have every right to the money you make, and no obligation to invest back into the business and no need to share it with anyone else. Although obviously, you must pay any business outgoings and put money aside to pay income tax and National Insurance!

With a Limited Company, you pay Corporation tax on the profits you make. This is a separate rate of tax from personal taxes and is based on the company’s annual profits.

5.  Easy to run

There are relatively few administrative or recordkeeping requirements compared to a private limited company business structure. Basic accounts are the only real necessity by law. The list of records you need to keep as a limited company is quite long, and you can get fined if you don’t follow the rules! You are, of course, responsible for your self-assessment tax return. This can be reasonably straightforward, but an accountant or bookkeeper can be hired if you wish.

With the introduction of MTD (Making Tax Digital), all businesses must supply online tax records from April 2026; find out more from our blog: Making Tax Digital ITSA.

Sole Trader Disadvantages

1.  Unlimited Liability

Just like it says, you have unlimited liability! Unlike a limited company (the clue is in the name), you are responsible for all debts the business accrues. This can spell bad news if your business goes downhill.

Your personal assets are going to be vulnerable, as the business there is no legal distinction between you and the business. The protection of a limited company safeguards against this as it is a separate legal entity. So, the level of risk involved in your business needs to be assessed.

As for liability for accidents or losses, if you get a comprehensive insurance policy, you can protect against this, but it would be you that gets sued, not the business.

2. Difficult to Raise Capital

Banks are less likely to lend to a sole trader, as essentially they are lending the money to you, not the business. It may also affect grants or loans available from various sources, such as angel investors. Sole traders, therefore, rely on their own financial backing.

3.  The Burden of Decision Making

As well as an advantage, it can be a disadvantage as all the decisions need to be made by YOU. That can be pretty exhausting and overwhelming if you have to make decisions on the future of your business or which direction to take. You may well have a support network, but ultimately the responsibility lies with you and you alone.

4.  Lack of Continuity

It can be really hard to have time off as a sole trader! If you are in charge and you do most of, if not all, the work, the time off can mean the business stops. As you grow, you may develop a team that can take the strain, but it is likely just to be you at least at the start and as we’ve said, as a business owner, you are where the buck stops, so if mistakes are made or problems occur, you may well be needed to get involved, even from your holiday villa.

5.  More Difficult to Work with Some Businesses

Not every business will deal with sole traders. It might sound ridiculous that it makes such a difference, but larger companies may only wish to deal with a limited company as the perception is of stability. You can, in fact, give the impression that you are larger than you are, whereas a sole trader is simply that.

There can also be insurance considerations in some industries. If you want to work with large corporations and want to be taken seriously, you need to consider the limited company route from the off.

So, there you have it, 5 reasons why to be a sole trader and 5 reasons why not to be! The decision of the business structure is ultimately yours and will depend on your business type and circumstances. You may also be interested in our other blog, the 5 advantages and disadvantages of having a limited company.

Reading both articles will help to decide on the best business structure.

Sole Trader FAQ

What Taxes Do I Pay as Self-Employed

You will complete a self-assessment tax return each year. As part of the process, a tax calculation is made, which works out the amount of tax you need to pay or reclaim. You will also be assessed for any National Insurance contributions due.

Do I still get a Personal Allowance for Tax?

Yes, you will still receive your tax-free personal allowance and you will pay tax on anything over this. The personal allowance is taken into account when the tax calculation is completed as part of your self-employed tax return.

Can I change from a Sole Trader to a Limited Company?

As a sole trader, you might find that as the business grows, it is more tax efficient to run as a limited company. You can then set up a Limited Company at Companies House and let HMRC know that you have ceased as a sole trader.

It is easier to change from a sole trader to a limited company than the other way around.

Do I need to Register at the Companies House Website?

No, only companies with a business structure of a limited company register at Companies House. Sole traders must register as self-employed with HMRC.

Sole Traders Advantages And Disadvantages – Related Articles

If you are thinking of setting up as a sole trader, here are some other articles and resources that you might find helpful for running your own business:

Best accounting software for Self-employed

Bookkeeping for self-employed

What is a sole trader

The post Sole Trader Advantages and Disadvantages appeared first on Business Accounting Basics.

We are here to help you with 7 top budgeting tips to help you get better at budgeting as a self-employed person. It can be daunting to suddenly manage personal and business finances, so try some of these and let us know how you get on!

1. Be strict about keeping business and personal finances separate

As a sole trader, you don’t legally need a business bank account or even a separate one, but it is SO much easier if you do. Making things easier for yourself from the start is the best way, so get a bank account for the business and make sure all the transactions there are just for your business and your personal account and cards are just for personal use. It will make doing your accounts a lot simpler.

There are plenty of excellent business banking accounts you can set up online now; Starling, Tide, Mettle and Monzo are free, and all get good reviews, especially Starling. Traditional high street banks usually offer the first 12-18 months free, but you may need to pay a fee. NatWest, Barclays, HSBC, etc., all have business banking accounts. As a sole trader, you can use a personal banking account to avoid fees, although the bank may frown upon this if they realise it is what you are doing.

Please note that if you are a Limited company, you MUST keep finances separate as the money is the business’s, not yours; therefore, a business bank account is required. Please see our blogs about the pros and cons of a limited company and sole trader.

2. Be Clear on Your Monthly Outgoings

Signing up for many things when you start can be tempting, so try to be sensible. If you can use the free CRM system or software option, do. As time progresses, you may expand and need to use the premium or upgraded versions of things, but keep track of the costs. Also, track office rental, fuel costs, stock, staffing, etc. Everything your business pays out over the month.

If you have a year or more under your belt, you can work out the average monthly cost of some of the less regular expenditure by adding a year’s worth together and dividing by 12.

3. Look at Business Expenses Regularly

Be brutal here; reassess your outgoings every quarter and determine what is needed. Are you paying for Adobe? How often do you use it? Are you paying for things for a team member who isn’t there? Can you get a better deal if you negotiate a renewal? You might be surprised, and it doesn’t hurt to ask. It can apply to anything you pay out; ask yourself if it can be obtained for less or if you need it. Technology changes, and new things come onto the market constantly, so keep updated or ask someone who knows.

4. Use a Budget Template

There are numerous budgeting templates at your disposal, or if you prefer, you can create your own spreadsheet using Excel. Our website offers a comprehensive template specifically designed for business income and expenditure, which can be easily customised to suit your business needs. Feel free to access it by clicking on the following link: https://www.businessaccountingbasics.co.uk/personal-budget-template/

Try to allocate monthly time to update it, perhaps when you do your bookkeeping work. This will help you monitor and track your income and outgoings accurately and see any patterns or areas you can cut down on.

5. Try to Create Regular Annual Income Sources you can Rely on

As part of running your business, you will try to get new sales; whether it is a service or product, you need customers. This is obvious, but the more regular and reliable this workflow is, the easier it is to budget. It is hard to give generic advice when your business could be anything; however, wherever your customer comes from, ensure you track this (data is powerful).

Create an email list of prospects, perhaps by giving away something (a lead magnet) and utilising multiple marketing streams. So, do not just use one social media platform or one advertising type; use a few if one starts to go wrong or you lose a social media account. Subscription models work well to create regular annual income; if that fits in with your business, think about how you could make it work.

6. Be Aware of Quieter Times of the Year

The more up-to-date your figures are, the easier it is to track when the quieter times of year are for your business. Christmas could be a booming time if you are in product sales, or it might be dead if you provide a summer-friendly service. It will vary, but every business will have times of the year when it is busier than others, and learning this is easy once you use a good accounting system, as you can view your figures on a graph or chart and track revenue.

Understanding this can help you offset these times by running special offers or even thinking of extra products and services to provide at that time. Or perhaps you want to plan some time off to coincide!

7. Budget Self-Employed Income Tax and NI

When budgeting for tax and national insurance, it’s crucial not to overlook this aspect, as it can quickly become a nightmare if you do! Remember, you need to set aside money for personal income tax and National Insurance, and the amount will vary depending on your profits.

Consider using a reliable online tax estimator, such as our self-assessment tax calculator, to make this process easier. By utilising such tools and planning your budget accordingly, you can transform the potentially stressful and chaotic experience of paying your tax bill into a smooth and hassle-free process. After all, receiving a substantial tax bill without having the necessary funds set aside can be overwhelming and daunting. So, preparing and ensuring you’re financially equipped will save you from unnecessary stress and worry.

Make sure you complete your self-assessment tax return on time and accurately. Look at hiring an accountant or bookkeeper if unsure of the process. They can help guide you through the complexities of filing your self-assessment tax return, ensuring you meet deadlines and have all the correct information ready for HMRC. Whether it’s keeping track of receipts or understanding tax codes, a professional accountant or bookkeeper will ensure your accounts comply with regulations and are accurate. Don’t let filing your self-assessment tax return be a headache: seek professional advice to ensure you get it right!

Accounting Software

Finally, a good accounting software package can assist in all your accounting needs, from raising invoices to tracking payments and preparing your financial statements. It helps ensure you have all the information needed for accurate reporting and saves time by streamlining repetitive tasks.

With a comprehensive accounting software solution, businesses can easily track their finances in real time, analyse trends over time, and make informed decisions about the future of their business. As a bonus, having a reliable and secure accounting package means you can be confident that the data you rely on is up-to-date and accurate.

We hope you find these tips helpful and can apply them to your business. Just remember to keep up to date with your accounts and bookkeeping and track everything, big and small, then budgeting will soon become second nature.

Further Reading for Self-Employed

If you are thinking of changing to a cloud-based accounting system, check out our article on the best accounting software for self-employed.

We hope you have enjoyed our article on how to budget. If you are self-employed, please read our related articles.

Claiming Business Expenses

Bookkeeping for self-employed

The post How to Budget If You Are Self-Employed – 7 Top Budgeting Tips! appeared first on Business Accounting Basics.

ITSA is Income Tax Self Assessment.

In this article, we will look at the following:

• What is Making Tax Digital (MTD)
• Making Tax Digital Deadlines
• The plans for Income Tax Self Assessment
• Why the delay?
• How to comply with MTD

What is Making Tax Digital?

Making tax digital is part of HMRC’s policy to get all businesses to file tax records digitally. The idea is that in time the whole system will be paperless.

Small Businesses are required to keep digital records and use third-party software to submit tax returns to HMRC.

MTD for VAT was introduced in April 2019 for VAT registered businesses over the threshold of £90,000.

The reason for introducing MTD is to:

• Reduce errors in business accounts and therefore reporting is correct for taxation.
• Reduce paperwork.
• Integrate business administration and taxation.

The following accounting packages are all MTD ready:

What are the Making Tax Digital Deadlines?

As a small business owner, it is essential to know any tax deadlines.

Here are the MTD deadlines for both VAT-registered and self-employed

MTD for VAT Deadlines

April 2019, all businesses over the VAT threshold of 90,000 were registered.

From April 2022, small businesses registered for VAT will need to comply.

MTD for Income Tax Deadlines

Making tax digital for income tax was a deadline of April 2023; it is extended to April 2026.

It is for taxpayers with business or property income above £10,000. It will include landlords, sole traders and partnerships.

At the moment, there is no fixed date for all MTD for income tax, but I am sure it will be announced soon.

Making Tax Digital Self-Employed

If your earnings are over £1,000, you need to register as self-employed and complete a self-assessment tax return.

You can also register as a sole trader if your earnings are under £1000. There are a few reasons why you may want to do this, including:

• To claim tax-free child care
• Voluntary contributions to Class 2 National Insurance

Currently, only businesses with business or property income over £10,000 will need to be MTD for income tax ready by April 2026.

The easiest way to ensure that you are MTD is to use compatible software.

There are many different options for software, and it is worth taking your time to choose the best accounting software for your small business. Options included both paid and free versions.

The other option is to use bridging software that works with non-compatible software like spreadsheets, accounting systems and other digital bookkeeping products.

It lets you send the required information digitally to HMRC in the correct format.

Making Tax Digital for VAT

MTD for VAT was introduced in April 2019 for businesses over the VAT threshold of £85,000 for taxable turnover; this has now increased to £90,000.

Businesses can opt-in if their business is under the VAT threshold. It is estimated that about a quarter of those under the threshold has opted in. From April 2022, all companies registered for VAT will need to produce digital records.

If you are registered for MTD, the chances are you will file vat returns online through accounting software.

MTD for Corporation Tax

The government is still planning for corporation tax but has suggested it will not start until at least 2026.

It will give small businesses and accountants more time to get ready.

Why the delay?

Over the last couple of years, businesses have struggled to survive due to the Covid pandemic and changes with Brexit.

Businesses are still trying to recover and may have issues with the supply of products to continue work.

With all the stress of running a business, some will be glad of one change they do not need to implement yet.

Is it Worth Getting MTD Ready?

Although, as a business, you do not need to be ready for making tax digital for income tax yet, it is worth spending the time deciding if the company will be better off getting ready.

The reasons for this are:

• Digital records by using software will help businesses make decisions.
• It is easier at the end of the accounting period to produce the reports required.
• Automating the accounts can save time and money.
• Professional branded invoices using a logo.
• Customers can settle bill payments through the software.
• Keeping track of debts.
• Bank feeds are automatic once set up with open banking.
• Accurate digital record-keeping.

Do I need a Bookkeeper or an Accountant for MTD?

Although you do not need an accountant or bookkeeper to complete your tax, they can be an asset to the business.

One of the main advantages is knowing the tax rules and what the business can claim for. It will help to reduce the tax bill.

A bookkeeper or an accountant can take the stress away from completing the accounts and allow you to concentrate on the sales and other admin tasks.

Making Tax Digital Accounting Software

There are lots of options for accounting software, most of which are MTD Compliant.

It is worth taking your time to choose the best accounting software for your small business. Start by making a list of everything you need; this may include:

• Stock
• Time management
• Expense Tracking
• VAT
• Making tax digital
• Invoicing templates
• Mileage
• Departments

We have produced a list of our best accounting software for small businesses. It looks at the best options for different business types.

Our top options for accounting software are QuickBooks, Xero, Ember and Zoho Books.

One free option that some small businesses use is a software called WAVE Apps. Unfortunately, it will not be compliant with making tax digital. WAVE is concentrating on the Canadian and US markets.

A complete list of accounting and bridging software is available on the HMRC website.

Making Tax Digital for Income Tax Conclusion

Self-employed businesses and landlords with a taxable income over £10,000 will need to be compliant with making tax digital from April 2024. The date was April 2023.

VAT-registered businesses with a turnover of over £90,000 are already using MTD to submit VAT returns.

The easiest way to comply with digital tax is through online accounting-compatible software.

The post Making Tax Digital ITSA Delayed appeared first on Business Accounting Basics.

Making tax digital for business will start affecting the smaller businesses which are not registered for VAT. It is expected to commence in April 2019. It is still unclear from HMRC if it will include all small businesses or if very small ones will be excluded.

Small companies will have to submit their accounts online to HMRC quarterly, which is in line if you are VAT registered. It is unclear at the moment how this will be done and which accounts software will provide the feature. I would expect that most of the main accounting package providers will be able to submit directly to HMRC, but will need to amend their software.

The government has to still write the legislation and until this is done there are no clear guidelines.

Making Tax Digital for Business – Why do we need it?

One of the main reasons for converting to digital tax is to reduce the amount of errors that are made. HMRC reports that over £8 million is lost in avoidable tax errors.

At the moment small business owners find it difficult to know how much tax and NI they owe until they complete their self-assessment tax return. With the pressure of running a business, they are sometimes not submitted until the deadline. This can then leave the business owner needing to pay the whole figure immediately. Digital tax will mean that you can calculate the figure owed over the course of the year.

Digital Tax should I get ready?

If you are a small business, it may be worth starting to use a full accounting software package like Xero, QuickBooks or Sage. This will allow you to get up to speed with the process of doing your own accounts.

If you have not got the knowledge or time to complete your own accounts then now could be the time to get a bookkeeper or accountant in to help. Bookkeepers can get very busy and may not have time to take on new clients when the digital tax is implemented.

Make sure if you do take on a bookkeeper that they are qualified and have the correct insurance in place. They also need to be covered under anti-money laundry.

Further information can be found on the HMRC website.

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