If you are new to self employment this article explains what you need to do to get your accounts up and running as a sole trader and to ensure that your finances are being well managed.
Getting Started
The first thing you must do is register with HM Revenue & Customs (HMRC) as being a self employed sole trader. In fact you have to do this within three months of setting up otherwise you can incur a fine of £100.
To register all you need to do is telephone the Help Line for the Newly Self-Employed on 08459 15 45 15.
National Insurance
One of the reasons for registering as self employed is that you will need to start paying National Insurance in a different way from if you were employed.
As a self employed person you will pay the following National Insurance contributions:
- Class 2 - This is a fixed weekly amount paid by monthly direct debit or a quarterly bill. For the tax year 6 April 2007 to 5 April 2008 the contribution is £2.20 / week
- Class 4 - This is a percentage of your annual taxable profit from self-employment, which you start paying when your profits reach a certain limit.
For the tax 6 April 2007 to 5 April 2008 you start paying Class 4 contributions on profits over £5, 225.
Class 4 contributions are paid along with your income tax using the Self Assessment tax return.
Self Assessment
Self Assessment is the tax return you must complete each year if you are self employed. It is used to calculate how much Income Tax and Class 4 National Insurance you need to pay.
It can be filled in on line or a paper copy can be completed.
The form SA103 is the Self Employment supplement to the self assessment.
Once you have submitted your will receive a Statement Of Account which shows how much:
- you owe
- you have paid
- you have to pay
Key Dates
The key dates you will need to be aware of for your accounts are:
- 30 September for submitting a paper self assessment return and to have the tax calculation done by HM Revenue & Customs
- 31 January for submitting a self assessment return if you are doing the tax calculation yourself
- 31 January for payment of Income Tax and Class 4 National Insurance for the previous accounting year.
For example for the year ended 5 April 2007, you will pay your Income Tax and Class 4 National Insurance on 31 January 2008
- 31 January and 31 July for payments on account
What Are Payments On account?
For the second and subsequent years that you are self employed, you may be required to make a payment of Income Tax on account.
A payment on account is an estimate of what your tax bill will be at the end of your accounting year, based on your previous year's profits.
Payments on account are usually made in two instalments on 31 January and 31 July.
In practice this could mean that on 31 January in your second year of trading you will need to pay:
- the tax due on your profit from your first year of trading plus
- half of the estimated tax due on your profit for the second year of trading
So it will be really important to make sure that you know what your tax liability is as you incur it, so that you can set aside the appropriate amount form the profit you are making in your business.
Why Keep Accounts
There are two main reasons for keeping your accounts up to date:
- To work out how much you have earned, your profit
- To calculate how much tax you owe the HM Revenue & Customs so you can budget for this throughout the tax year
To simplify your accounts you can use the headings and layout as set out in the self employed self assessment form SA103, Income and Expenses section, mentioned above.
If you are unsure how to keep your accounts the notes to the self assessment form SA103 do provide a good explanation or you may need to employ an accountant to help you keep your books and complete your tax returns.
Elaine is the founder of www.CheapAccounting.co.uk which offers accounting services starting at a fixed monthly fee from just £9.99 to sole traders, partnerships, small limited companies and in particular start up businesses. With over 20 years experience in accounting and IT she is well placed to businesses on their accounting matters.
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