Self-assessment tax returns for sole traders

Self assessment tax return for sole trader

There are many benefits to being self-employed; the autonomy, the freedom to pursue interesting projects and the ability to choose your own working hours to name just a few. However, with these advantages come a number of responsibilities - as a sole trader, completing your self-assessed tax return is one of the most important.

HMRC requires all self-employed workers to complete their tax return to a strict deadline – a potentially worrisome task for many. However, it’s important to address your business’ tax status sooner rather than later. 

What is a self-assessment tax return?

A self-assessment tax return is used to inform HMRC of a sole trader or partner in a business partnerships annual income, tax and National Insurance liabilities. It must be completed and submitted online to HMRC annually before 31st January each year. To do this, sole traders and partners of business partnerships fill in Form SA100, which takes into account other incomes (for example from property), as well as money earned through work.

Why do I need to fill in a self-assessment tax return?

As a sole trader, you are responsible for informing HMRC of the details of your annual income. While employees have their tax and National Insurance calculated for them by their employer, self-employed workers must complete a self-assessment tax return in order to HMRC to collect this.  

If you’ve earned less than £1,000, it may not be necessary for you to complete a self-assessment form – check the gov.uk website for more details.

In addition to sole traders and partners in business partnerships, some people who are employed must fill in a self-assessment because they generate a separate income, for example from property or land.

Find out if you need to complete a self-assessment.

How to fill in your self-assessment

This step-by-step guide will help you fill in your self-assessment tax return and file it before the tax return deadline.

  1. Gather your information. Find all the information you need regarding your income, including details of earnings and business expenditure, income from employment (if you have a separate job), capital gains, rent, pensions and redundancies. Gov.uk has a full list of taxable income sources.
  2. Fill in the form. Focus on the sections relevant to your situation and fill in your personal details. If you’re filling in the form online, HMRC will remove irrelevant sections as you go.
  3. Report your earnings. With your collected information, you’ll need to submit your yearly earnings - including other taxable incomes such as property or investments.
  4. Include tax-deductible expenses. Add any allowable expenses such as travel, insurance or marketing costs that are tax-deductible.

What are the deadlines for tax returns?

The tax year runs from the 6th April to the 5th April the following year. Tax on any income earned during that time has to be paid by 31st January. This is also the deadline for completing your self-assessment form online. If you’re filing your tax return on paper, the deadline is earlier – the 31st October of the previous calendar year.

Whether filing online or on paper, you will need to register for self-assessment and receive your unique taxpayer reference number in plenty of time. It’s important to remember that, although this is the deadline, you can file your self-assessment and pay your tax any time from the end of the tax year.

Filing your tax return by post

If you’d prefer, you can fill in your tax return form as a hard copy and return it to HMRC by post. All the information for this, including a copy of the form, can be found on the gov.uk website. However, the deadline for posted forms is earlier than the online method.

Filing your tax return online

When you have all your income details to hand and your unique tax reference number, you can begin to fill in your tax return online. Simply follow the steps on HMRC’s interactive form, which will lead you to different sections depending on your previous answers.

In addition to your personal details and reported earnings, the form will ask for your tax-deductible expenses. These are expenses that can be deducted from your overall taxable income, such as travel or equipment. See the gov.uk website for a full list of tax-deductible expenses.

What happens next?

Once all your details are entered online, or you’ve sent your form off in the post, HMRC will calculate how much you owe in income tax and National Insurance. An invoice will then be generated, which you must pay before 31st January.

What is payment on account?

Payment on account is a way for HMRC to collect taxes and National Insurance payments from you before you’ve received the tax bill itself. For sole traders, payment on account is a convenient way to spread the cost of a tax bill. To do this, HMRC estimates the money owed using previous tax bills.

According to the gov.uk site:

“You have to make 2 payments on account every year unless:

  • your last Self Assessment tax bill was less than £1,000
  • you’ve already paid more than 80% of all the tax you owe, for example through your tax code or because your bank has already deducted interest on your savings.”

Together these two payments will cover your previous year’s tax bill. You will receive a tax rebate if your self-assessment income decreases year-on-year.

What happens if I miss the tax return deadline?

If you miss the deadline for filing and paying your tax return, you will receive a fine. The initial fine is £100, but this will rise if the delay exceeds a three-month period. The deadline for payments on account are 31st January and 31st July each year.