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Tax return paperwork

Self Assessment tax returns for sole traders

If you are self-employed you will pay your tax using a self-assessment tax return. This article will give you an overview of the self-assessment process and your legal obligations as a self-employed individual.

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How do I tell HMRC that I need to fill in a tax return?

It is your responsibility to inform HMRC that you have started to trade and to file a tax return under self-assessment.

As a business owner you’re responsible for:

  • keeping records of your business’s sales and expenses
  • sending a self-assessment tax return every year
  • paying Income Tax on your profits and Class 2 and Class 4 National Insurance
  • bills for anything you buy for your business
  • registering for VAT if your turnover reaches the VAT threshold (currently at £85,000)
  • registering with the Construction Industry Scheme (CIS) if you’re a contractor or sub-contractor in the construction industry.

To check if you need to fill in a Self Assessment tax return click here

You can register for Self Assessment at GOV.UK 

GOV.UK can also help you decide whether or not you are trading.

Do I need to use an accountant?

You do not need an accountant to file your tax returns,  you can file them yourself.

However, it is important that you understand the legal requirements, not only in terms of the figures that are included, but in terms of the deadlines that penalties. You’ll get a penalty if you need to send a tax return and you miss the deadline for submitting it or paying your bill.

Search our database to find an accountant or bookkeeper.

Self employed tax and national insurance calculator

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Please note that the results you see on your screen are estimates only. This is based on base rates and does not include things such as student loans. For full details of tax allowances, please see our article on 2019/20 tax rates.

Your take home pay and calculation

Please note that the results you see on your screen are estimates only. This is based on base rates and does not include things such as student loans. For full details of tax allowances, please see our article on 2019/20 tax rates.

What income and expenditure is included?

All taxable income will need to be reported on your tax return.

ISA interest and other non-taxable income such premium bond winnings or casual gambling profits do not need to be reported. There are special rules when it comes to taxing your taxable personal income.

Remember you are entitled to your personal allowance which is £12,500 from April 2019 (this is restricted once your income reaches £100,000).

Non-savings income is taxed first. This includes:

  • Salary
  • Trade profits
  • Rental income.

Bank interest is taxed second. The rates of tax that you apply are:

  • 20% (for the first £37,500 of taxable income),
  • 40% for the next £112,500 and
  • 45% for any income in excess of £150,000.

Dividends are taxed last.

The first £2,000 of dividends are taxed at 0% and then 7.5%, 32.5% and 38.1%, where they are taxed at the basic, higher or additional rates.

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What information do I need to keep?

Trade profits

Information that you will need to keep to prepare your accounts will be:

  • Sales invoices and purchase invoices
  • Fuel receipts
  • Receipts for business expenses
  • Business bank statements
  • Cheque book stubs
  • VAT information (if VAT registered)
  • Wage slips and summaries if you employ staff
  • Details of loans and capital items such as machinery, cars etc.

It is vital that books and records are kept safely as there are rules surrounding how long business records must be stored for.

Other income

You need to keep: 

  • P60s for salary and employment income
  • accounts and trade profit computations for taxable trade profits
  • bank statements for reportable bank interest
  • rental statements for rental income
  • pension statements for pension income
  • dividend vouchers for dividend income.

When do I need to do the returns?

The deadline for self-assessment returns is:

  • 31 January if filing your return online
  • 31 October if you are filing the paper version following the tax year ending.

The last tax year started on 6 April 2019 and ended on 5 April 2020. The current tax year started on 6 April 2020 and will end on 5 April 2021. 

If you need to submit a self-assessment return for the first time, you need to inform HMRC by 5 October following the tax year in which you started trading.

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What are payments on account?

Payments on account are advance payments towards your tax bill.  They are made in two instalments. 

Income Tax is payable on 31 January following the tax year. Where most of your income is not taxed throughout the year as it is earned e.g. a self-employed individual, it is likely that you will fall under the payments on account regime.

Let’s say it is 2019/20 and you make payments on account each year. For example, if you paid £1,000 in the tax year for which you are filing your return:

  • You will make a payment on account on 31 January 2019, which will be equal to half of the previous year’s tax liability (£500)
  • You will make a further payment on account on 31 July 2019, once again equal to half of the previous year’s tax liability (£500)

This will include Class 4 National Insurance Contributions where applicable, but not student loan repayments or Capital Gains Tax.

Once the actual tax liability is calculated for 2019/20, you will deduct the payments you have already made and pay or reclaim the difference from HMRC.

Most small businesses will work with an accountant here to ensure they are making the correct payments on account. Business accounting software can also help if you are confident in calculating these yourself.

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