First thing’s first, let’s be clear on who needs to complete a self-employed tax return and why. If you’re a sole trader, or you’re a partner in a business, you’ll need to complete a self-employed tax return if you made more than £1000 in the previous financial year (from 6 April – 5 April).
To get started you will need to register for self-assessment with HMRC. The deadline for this is 5 October, and you need to do it in the second tax year after starting your business. If you miss this date, you could be fined. Once you’re set up, you’ll receive a Government Gateway User ID and your own personal tax account.
You’ll need to register as a sole trader and complete a sole trader self assessment if any of the below are applicable to you:
You’ll need to make sure you have accurate records of all your income and expenditure. Make sure you keep records throughout the year. This makes completing your return easy. It also means that should HMRC want to check your return after you’ve filed it, you have all the relevant records. You need to keep your records for five years after the 31 January deadline
If you have not already filed online before, you will need to register to file online. HMRC will then send you an activation code and recommend that you allow 20 days to receive this.
Tips on completing your return:
Allowable expenses include:
Finally, check all details before you submit and file.
After you submit your return you should receive a confirmation message and a reference number. HMRC will calculate the tax you owe, as well as the National Insurance contributions you need to pay.
The deadline for paying your small business or sole trader tax return is the same day as the deadline for filing – 31 January. If you file your tax return late, you’ll get a £100 penalty (if it’s up to three months late – it’s more if it’s later). HMRC are changing the way that penalties apply by now using a points-based system.
One important point to note is that most self-employed people usually need to make a payment on account too. This can often catch out those who are newly self-employed people.
You can pay your tax bill in a number of ways including:
You will need to pay one instalment by 31 January and one by 31 July.
Payment on account is intended to help the self employed keep on top of their payments by spreading them out, but it’s important to plan for these bills to avoid running into problems.
HMRC use the previous year’s tax bill to estimate the next one. If you expect your overall income for the following year to be considerably lower than the previous one, it’s possible to apply to HMRC to reduce payment on account for you. To reduce payment on account for your business, log in to your HMRC account and select ‘reduce payments on account’.
Making Tax Digital (sometimes known as MTD) was launched in April 2019. It’s overall aim to is to make the UK tax system more resilient and more effective, while increasing productivity for businesses.
To date MTD has impacted VAT-registered businesses with a taxable turnover above the VAT threshold (£85,000). They are now required to keep digital records and use software to submit their VAT returns.
From April 2022, VAT-registered businesses with a taxable turnover below £85,000 are required to follow Making Tax digital rules for their first return.
Under Making Tax Digital you’ll need to use third-party software to maintain your records throughout the year, tracking your business income and expenditure digitally. You’ll use the software to send quarterly summaries of your business activity, and to file a report at the end of each year.
Many businesses are already finding that going digital saves time and increases efficiency.
To find out more, take a look at our article on Making Tax Digital for businesses.
All self-assessment taxpayers will need to comply with Making Tax Digital by April 2024. Currently, Making Tax Digital has only been enforced for VAT registered businesses with a turnover exceeding £85,000 and those who have volunteered, but eventually, HMRC will only be accepting digital tax returns. Some key dates to be aware of:
All self-employed businesses or landlords with annual business or property income above £10,000 will need to follow rules for Making Tax Digital Income Tax from their next accounting period from April 2024.
Unincorporated Partnerships with an income over £10,000 will need to join Making Tax Digital for their self assessment from April 2025 onwards.
Alison Wild BCom (Hons), MAAT, MATT, Taxation Technician is a highly respected industry professional who has been working with and advising SMEs in areas including tax, pensions, insurance and marketing for over 25 years. She is a member of the Association of Accounting Technicians (AAT) and Association of Tax Technicians (ATT) and also has 20 years' experience as a residential landlord.
This is a marketing article by Towergate Insurance.
Date: December 22, 2021
Category: Small Business