Sole traders are the most common type of self-employed person. It’s easy to set yourself up as a sole trader with no founding legal documents or other agreements required. All you have to do is inform the HMRC you are trading before you begin.
The legal and taxation requirements on sole traders are deliberately simple to help encourage people into business and to foster entrepreneurship. Many larger companies, including multinationals, once began as sole trader enterprises.
What financial records are required for sole traders, and do sole traders have to produce annual accounts?
Sole trader accounts: What you need to know
As a sole trader, you need to work out how much you owe each year. To do this you require a clear picture of your income and expenditure. This can also help you budget and ensure you put enough money aside to pay HMRC your tax and NI bill by the end of January each year.
Sole traders are legally required to maintain a record of their income and expenditure for at least five years. These need to be kept safely, so that they are accessible by HMRC if they are requested.
In practice this means keeping a record of:
- Business income
- Personal income (such as money earned from property and investments)
- VAT records if your turnover is higher than the VAT threshold.
- PAYE records if you have employees on your payroll
How taxes are calculated
Sole traders are required to pay tax in the same way as employees do. Rather than paying through a PAYE scheme as is the case when you’re employed, this is completed annually. Taxes are calculated and collected through the HMRC’s self-assessment tax return and are paid by the end of January following the end of the tax year.
Sole traders are required to pay:
- Income tax on the net profit made
- National Insurance at a rate and class dependent on your profit.
- VAT if your turnover is more than the threshold.
As your business grows and becomes more complex, this process can become more time-consuming which is why many sole traders will choose to employ accountancy services.
Taking care of your accounts so you can take care of business
As a sole trader, you have to be a jack or jill of all trades. It can be time-consuming taking care of the financial record-keeping aspects of your business, taking you away from other tasks that could ultimately be more lucrative.
At Venn Accounts, we’re committed to providing a comprehensive, yet straightforward and jargon-free accounting service for businesses of all sizes. Because we’re cloud-based we can provide a professional service wherever you are in the UK
Our statutory accounts service ensures your accounts stand up to scrutiny and that you’re on track to meet your goals and objectives. We’re on your side as your business grows and develops.
To find out more about how we can make your annual accounts simple while saving you money speak to one of our experts today.