Requirements as a Sole Trader
Being a sole trader is the simplest way to run a business, although you are personally liable for your business debts. All the business profits belong to you and are taxed as income, whether you take the profit for your own use or leave it in the business.
You have to register as self-employed, which can be done by calling the Newly Self-Employed Helpline on 0300 200 3504. You will be sent a Unique Tax Reference, and tax and national insurance records will be set up for you, along with a Self-Assessment online account.
Or you can register online for Self-Assessment, VAT registration and as an employer.
You will normally have to pay Class 2 National Insurance Contributions, which have a flat weekly rate. Payments can be made monthly or 6-monthly by direct debit. Your NI payments are a personal cost; if you pay them from your business bank account the transactions should be marked as personal drawings.
You will be required to fill in an annual Self-Assessment to provide details of all your earnings (the profit of a sole trader business and any other income you’ve received). This information is then used to work out how much Income Tax and Class 4 National Insurance you have to pay.
So that you can fill in a Self-Assessment form, you are legally required to keep records for your business and of any other income you receive. The minimum records you need to keep are:
Invoices for sales and purchases
Receipts for business expenses
A VAT registered business is normally required to submit a VAT return quarterly. To do this you need to record the net (without VAT) value of sales and purchases as well as the VAT part of the transactions.
A sole trader who employs staff is required to keep records of the amounts paid to staff and the tax and NI deductions made on their behalf. Staff are usually paid weekly or monthly. Tax deductions and Employers National Insurance are paid to the HMRC monthly and complete records of all salaries and deductions are to be submitted to the HMRC every month.
Find out more from the HMRC – Tax Returns for the Self-Employed
Keep records of all sales and purchases, including the VAT element if you’re VAT registered.
Keep records of all salary payments and deductions if you’re an employer.
Keep notes of when returns and payments are due to the HMRC to avoid being fined.
- Keep all sales and purchases invoices, bank records and business expense receipts
- This will help when completing your annual Self Assessment Tax Return
- If you’re an employer keep records of staff salaries and deductions
- Keep records of all VAT transactions if you are VAT registered