Starting your activity as a freelancer and filing your self-assessment tax return can feel daunting, especially if it’s your first time around as a sole trader. It can be confusing to determine what information to include. We have put together a guide to help you prepare and make the process as smooth as possible.
Preliminary Steps Before Starting Your Business:
Before you can start working in the UK, you need a National Insurance Number. If you live in the UK and your parents have filled out a Child benefit claim, you’ll be automatically sent one around your 16th birthday. Otherwise, you must live in and be eligible to work in the UK, be at least 19 years old, have a Biometric Residence Permit (BRP), and have an EU passport or national identity card, Norway, Lichtenstein or Switzerland.
Once your NI is sorted, you need to register with HMRC and start a self-assessment tax return. After registering, you will receive a 12-digit Government Gateway ID and a P10-digit Unique Tax Reference (UTR).
Moreover, HMRC requires any self-employed to register for National Insurance under Class 2 (if profits exceed £6,515) and Class 4 (greater than £9,569). Class 4 is automatically calculated annually as part of your profits and included in your taxes once your self-assessment is complete. Class 2 is a flat-rate contribution calculated weekly. You’ll need to pay in a lump sum later if you don’t register for National Insurance.
Choosing Your Business Structure
Sole Trader:
Purpose: Sole trading is suitable for individuals who are working for themselves. It's the simplest form of business structure and is ideal for businesses with minimal overheads and few assets.
Earning Limits: There are no specific earning limits to trade as a sole trader. However, you must register for VAT if your turnover is over £85,000.
Advantages:
- Complete control over the business.
- More straightforward accounting and less paperwork.
- You keep all the profits after tax.
Disadvantages:
- Unlimited liability, meaning you're personally responsible for any business debts.
- Potentially higher tax rates on large profits.
Partnership:
Purpose: Partnership is suitable for businesses with two or more individuals who want to share the responsibilities, costs, profits, and losses of a business.
Advantages:
- Shared responsibility and workload.
- Potential for more investment opportunities.
- Flexibility in sharing profits and losses.
Disadvantages:
- Unlimited liability for all partners (unless it's a Limited Liability Partnership).
- Potential for disputes between partners.
Limited Liability Partnership (LLP):
Purpose: An LLP combines elements of partnerships and limited companies. Suitable for businesses that want the flexibility of a partnership with the limited liability of a company.
Advantages:
- Limited liability for partners.
- Flexibility in profit distribution.
- No requirement for a board of directors.
Disadvantages:
- More complex accounting and reporting requirements.
- Public disclosure of business financials.
Limited Company:
Purpose: A Limited Company is suitable for businesses that want to separate their personal and business finances. They are often chosen by growing businesses or having a significant turnover.
Advantages:
- Limited liability, protecting personal assets.
- Potential tax advantages and efficiencies.
- Enhanced professional status and credibility.
Disadvantages:
- More complex accounting and administrative responsibilities.
- Public disclosure of company financials and other details.
Registering with HMRC
Before starting your business, ensure you have a National Insurance Number and an online account with HMRC. Before you commence your business operations, it's imperative to register for Self Assessment with HMRC. Registration is a crucial step for all sole traders and partnerships.
You can set up an account for HMRC online services on the official HMRC website. After registering, you'll receive essential details like the Government Gateway ID and Unique Tax Reference (UTR). Safeguard these credentials. You can set up an account for HMRC online services on the official HMRC website.
The documents and forms required during the process will depend on the type of account you're setting up (individual, organisation, or agent). Typically, you need personal identification, proof of address, and business-related documents if registering an organisation.
Useful Links:
- Sign in to HMRC online services
- Set up an account for HMRC online services
- Get help with signing in to HMRC online services
- HMRC service availability and issues
- Customs Declaration Service
Key Financial Dates for Sole Traders (2023-2024 Tax Year)
The UK tax year starts on 6th April and ends on 5th April of the following year. The 2023-2024 tax year will begin on 6th April 2023 and conclude on 5th April 2024.
If you're starting as a sole trader, you should register with HMRC as soon as possible, but the deadline is by 5th October in the second tax year of your business. The deadline for those starting in the 2023-2024 tax year would be 5 October 2024.
Paper Tax Return Deadline: If you file a paper tax return, the deadline is 31st October, following the end of the tax year. For the 2023-2024 tax year, this would be 31st October 2024.
Online Tax Return & Payment Deadline: If you're filing your tax return online, the deadline is 31st January, following the end of the tax year. For the 2023-2024 tax year, this would be 31st January 2025. On this date, you should also pay any tax you owe.
Payments on Account: If your tax bill is over £1,000 and less than 80% has been deducted at source (e.g., from employment), you might need to make 'payments on account'. These advance payments towards your next tax bill are due by 31st January and 31st July.
VAT Registration and Management:
You must register for VAT if your annual turnover is over £85,000. You can register voluntarily if it suits your business, for example, if you sell to other VAT-registered companies and want to reclaim the VAT.
You usually need to send a VAT Return to HMRC every three months. This period is known as your 'accounting period'.
When declaring VAT, you must account for the VAT you've charged on your sales (output VAT) and the VAT you've been charged on your purchases (input VAT). If the output VAT exceeds the input VAT, you owe HMRC the difference. You can claim a refund if the input VAT is more than the output VAT.
Filing Your Tax Return Online:
While sole traders don't need to file with Companies House, other business structures like LLPs and Limited Companies do.
When preparing your financial statements, remember that the tax year runs from the 6th of April to the following 5th of April. So, only include information in that accounting year. Have the subsequent sales and financial information ready ahead of time:
- Sales you invoiced customers during these dates.
- Sales for which you completed work but have yet to receive an invoice.
- Sales to customers.
- Private sales of goods related to your business (through eBay, Gumtree, etc.).
- Grants you have obtained.
- Income statement from a trust.
- Rental property profit.
- Don't include any personal income or other income unrelated to your business.
- Bank interest and tax information for any account associated with your business. You must file a separate foreign income page if you have foreign accounts with interest greater than £2,000. Otherwise, combine it with your UK bank interest.
A sole trader can also claim business expenses, including office costs, travel, professional associations, technology, insurance, and large equipment used for over a year. Large equipment like a new computer should be counted as a capital allowance. Be careful not to include any personal travel in these claims. Flights, car journeys, trains, and the like must be associated with your business. Clothing can be included too, but it must be a uniform or worn only as part of the job. Keep your receipts on file until 2027.
Remember, it is important to file and pay on time. Otherwise, you could see a £100 fine from the HMRC.
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