Setting up as a Sole Trader is an exciting time where you will quickly discover the big differences between working for yourself and being a conventional employee.
To help, here we answer some frequently asked questions about running a business as a Sole Trader and how to manage your finances, salary and tax returns.
Do I need to keep business accounts?
A resounding, yes!
Bookkeeping is an essential part of running a successful company and helps you to monitor and anticipate the flow of money in and out of your business. It is also important to produce invoices for any work you undertake and to retain receipts for any goods and services purchased in relation to your business such as equipment, travel costs or stationery.
All this helps to ensure that your business is completely up to date and compliant when it comes to filing annual accounts with Her Majesty’s Revenue and Customs (HMRC).
Do I need a Business Bank Account?
Sole Traders are not legally required to have a business bank account because their personal and business income is treated as the same by HMRC. This means you can use your personal bank account for all business transactions related to your company.
That said, Accountants strongly advise setting up a business account as this helps to manage your personal and professional finances separately and offers a clearer and more efficient way of recording and reporting income and expenditure.
NB: This is particularly important if you wish to pay yourself a monthly salary, as the money can be transferred cleanly from your business account to your personal account.
How much should I pay myself?
Many Sole Traders pay themselves a set salary or calculate a percentage of their monthly profits to be paid as a wage. Whatever you choose to do, always remember to set aside money for covering business expenses, tax contributions and even a modest contingency fund.
How much tax will I pay?
Sole Traders pay tax at a rate based on the annual profit their business makes:
* If your annual profits are below £50k you will pay 25% tax.
* If your annual profits are between £50k and 100k you will pay 40% tax.
* If your annual profits are more than 100k you will pay 45% tax.
How do I pay tax?
Sole Traders must submit an annual Self-Assessment Tax Return to HMRC that will be used to calculate the income tax and National Insurance contributions that you owe. There are several different methods for paying your tax balance, with strict deadlines in place.
Find out more
If you are a Sole Trader and need help and advice in keeping your books and filing Self-Assessment Tax Returns, please contact the friendly team at Ease Accounting today on 0800 002 5986.
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