How much should I put aside for tax as a sole trader?
Joshua Ruthven from Page Kirk's tax department gives some practical advice to those working for themselves.
If you're a sole trader, you are taxed in a similar way to regular employees. Instead of paying corporation tax in the way a limited company does, you are taxed once as one entity. You must complete a self-assessment tax return and pay a percentage of income tax and national insurance contributions based on your profit. It is paramount, therefore, that your profit is calculated accurately.
How do I calculate profit?
Your profit is calculated by recording the income you receive and deducting allowable business expenses. The lower the profit, the less tax you pay. For this reason, it is important you can document your income and keep track of expenses. Your accountant should be able to supply you with a list of those expenses that are tax deductible. Some may come as a surprise.
Examples of allowable expenses
- Office expenses – such as office/mobile telephone
- Staffing – such as the cost of salaries or a contractor
- Uniforms – cost of staff uniforms or dry-cleaning
- Utilities incurred – such as heating, electricity and insurance
Contact a member of the team today for more information on how to claim allowable business expenses as a sole trader.
Once you have deducted all of your allowable business expenses and have consulted an accountant to ensure that they are accurate, you are left with your annual profit. This figure is the amount that you will be taxed on.
How much should I set aside to pay my bill?
- Profit less than £50,000
It is advised that you set aside around 25% of your profits for taxes
- Profit up to £100,000
it is advised that you set aside around 35% of your profits for taxes
- Profit above £100,000
Seek professional advice because the rate of tax you pay depends on your exact level of profit
Payment on Account
If your annual tax bill is over £1,000, you may have to pay 'on account'. This means that you will essentially pay your tax in two instalments: one on 31st January and another on 31st July. Each payment will be approximately half what you paid last year in tax. If your profit increases year on year you will also have a balancing payment of tax to pay each January. This can result in unexpected tax liabilities which emphasises the importance of planning for these.
In order to help plan for meeting your tax liabilities, it is a good idea to use a digital accounting platform. This is also a great way of making sure that you aren't missing out on any deductible expenses by reducing the likelihood of lost receipts.
For more information on cloud accounting software such as Xero and QuickBooks – or more guidance on how sole traders are taxed – don't hesitate to contact a member of the Page Kirk team today by calling on 0115 955 5500 or emailing enquiries@pagekirk.co.uk