Self-assessment tax returns for sole traders

However, with these advantages come a number of responsibilities and, once you’ve set up as a sole trader, completing your self-assessment 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 a way of showing HMRC how much your business earned during a set time period (also known as annual income), and therefore how much tax you owe them.

The return must be completed and submitted to HMRC annually before 31st of January each year (unless you submit a paper return). To do this, sole traders and partners of business partnerships fill in Form SA100, which takes into account other income (for example from property), as well as money earned through work.

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

When you work as an employee, PAYE taxes are automatically deducted from your salary every month. Your payslip will show the amount you paid in tax and National Insurance (NI) that month, as well as other deductions like pension contributions, student loans, and you will also be able to view the Employer’s NI also paid. However, when you run your own business, HMRC has no way of tracking your income and relies on you to tell them via the self-assessment process. As a sole trader, you are responsible for informing HMRC of the details of your annual income.

If you earn less than £1,000, either from your business or from additional income, you may not need to complete a self-assessment form.

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

If you’re unsure whether you need to complete a self-assessment tax return, you can find more information on the government website.

How to fill in a self-assessment tax return

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

Step 1: Register as self-employed

If you intend to set up in business, you must notify HMRC of the potential chargeability for tax and National Insurance Contributions (NICs) by the 5^th of October following the end of the tax year in which your business started.

If you haven’t filled in a self-assessment tax return before, you should register with HMRC in order to get your Unique Taxpayer Reference (UTR). This will make HMRC aware that you have a business and also allows you to complete your tax return online.

Your UTR is important and will be needed for any tax activity, so do be sure to make a note of it. Once you have this information, you can set up a Government Gateway account. Further instructions on how to do this will be included in the letter you receive with your UTR.

Upon setting up a Government Gateway account, you’ll receive more correspondence with an activation code. Enter the code in your account and the initial setup is complete. You can then send your self-assessment return via this account.

Step 2: Gather important information.

There is lots of financial information required to fill out a tax return, and therefore you should spend some time gathering all the documents and data you need, including details of your earnings, income from employment (if you have a separate job), capital gains, business rent (if you have premises), pensions and business expenditure. Gov.uk has a full list of taxable income sources on their site.

To get this information, you will likely need copies of your bank statements, a P60, student loan statements, receipts, invoices and more. This is why it’s so important to keep up-to-date  accounting records that outline your business’ income and outgoings.

Step 3: Fill in the return

The next step is to complete the self-assessment tax return (Form SA100), but you only need to fill in the specific sections that are relevant to you and your business. Filling in the form online is the easiest option, as HMRC will remove irrelevant sections as you go.

You will also need to report on what you’ve earned and you can use the information and data you collected in Step 2 to do so. You must submit your yearly earnings, which is your turnover from your business, but may also include other taxable incomes, such as property or investment. Additional income should be included here, such as from owned properties or investments.

The final bit of information to include is any tax-deductible expenses. This could be costs of sale (e.g. stock, supplies, parts), travel and subsistence costs for work purposes (such as train fares, flights hotels), business insurance, administration or marketing costs.

Once the form is filled in, you should take the time to check everything is correct and that you’ve included all the necessary information. If you’re unsure of any figures, you can provide estimates and amend them at a later date. Submit the return via the HMRC portal and keep a note of the confirmation number they provide.

All the documents that you initially gathered should be kept in a safe place in case HMRC require more information or wish to investigate further. When you’re self-employed, this information should be kept for at least five years and 10 months, however if you’re employed by someone else and submitting a return for additional income, you should keep the details for up to two years.

Should I file online or by post?

Traditionally, all tax returns would have been filed by post. HMRC’s internet filing service commenced in July 2000 and around 11 million people now do so. This has been facilitated by the introduction of accounting software, but HMRC has been generally pushing for many years to Make Tax Digital (MTD) and indeed MTD for VAT businesses over the VAT threshold commenced in April 2019. Already, in some cases, online is the only way you can submit your forms.

Filing your tax return online

Submitting your return online is the easiest and fastest option, and it will be mandatory for many businesses from 2022. The government announced that any business with a taxable turnover of less than £85,000 will need to follow ‘Making Tax Digital’ rules for their first return on or after April 2022.

If your business currently sits under this threshold, you can voluntarily opt in now.

HMRC are looking to introduce MTD for income tax by April 2024. This would require self-employed businesses to keep digital records of their income and expenditure and would essentially mean that by 2024, online filing is likely to be the only option.

Filing your tax return by post

If you’d prefer or your business has a taxable income of more than £85,000, you can fill in your tax return as a hard copy and return it to HMRC by post. All the forms can be found here and are available to print, ready to be used and filled in. However, the deadline for posted forms is earlier than the online method (October 31^st instead of January 31^st), and you should account for the extra delivery time.

What are the deadlines for tax returns?

The tax year runs from the 6th of April to the 5th of April the following year. The tax on any income earned during that time must be paid by January the following year, no matter whether the return was submitted by post or online.

For example, for the tax year 6th of April 2021 to 5th of April 2022, you must register with HMRC by 5th of October 2022, and submit your paper tax return by midnight on the 31st of October 2022 or your online tax return by midnight on 31st of January 2023. The tax that you owe must also be paid by midnight on 31st of January 2023, but you can pay it prior to this date.

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 three months. As a concession to the pandemic HMRC extended the deadline to the 28^th of February in 2021 and 2022? While late filing penalties will not be charged for online tax returns received by the 28^th of February, interest will be charged on any outstanding tax bills from the 1^st of February. You can find out more about the extension provided to complete your self-assessment here.

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. A tax bill will then be generated, which you must pay by the deadline, as stated above.

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.

You can make two payments on account every year, unless your last self-assessment bill was less than £1,000 or you’ve already paid more than 80% of the total tax owed.

Together the two payments, due on the 31st of January and the 31st of July, will cover your previous year’s tax bill. You will receive a tax rebate if your self-assessment income decreases year-on-year.

Summary

• A self-assessment return shows HMRC how much your business earned during a set time period, usually the tax year.
• It must be completed if your business or additional income brings in more than £1,000 a year.
• You need to register your business with HMRC and submit the tax return online or by post.
• The return involves reporting earnings and tax-deductible expenses.
• The tax year runs from 6th of April to the 5th of April the following year.
• The deadline for sending a return is the 31st of January for online returns and the previous October 31st for paper returns.
• Tax bills must be paid in full for the previous tax year by the following 31st of January.

Protection against tax investigations

Ensuring you've completed your self-assessment tax returns correctly can be time consuming and difficult. If you accidentally make a mistake with your tax return, this could lead to a tax investigation from HMRC.

In situations like this, legal expenses insurance can protect you financially and provide you with peace of mind.

Being protected with the right type of business insurance can be essential for sole traders due to them having unlimited liability.

Find out more about sole trader insurance or get a quick quote here.