As a self-employed or sole trader, you need to set up your accounts and keep track of your income and expense properly. Why? To know how much you are earning and what you owe to the government. Therefore, you need to understand tax, NICs and other things to set up your accounts and to keep track of everything. So in this blog, we’ll delve into how to do accounts for self employed? Let’s start!
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How to do Accounts for Self Employed?
Here are the things you need to know before setting up accounts:
1) Open a Business Account
Although a bank account is not mandatory for you, as you and your business are considered the same entity as self employed, however having a separate bank account for your business will make the recording process convenient for you. It will take less time to record your income and expenses, helping you to complete your self-assessment tax return and annual accounts effectively.
2) Income Tax and NICs
After opening a separate bank account, you need to be aware of what income tax and National Insurance you are liable to pay. For this reason, you need to know the tax rate and threshold to pay them accurately. Remember that you don’t need to pay tax on the basic income up to £12,570 ( this is the standard personal allowance in 2021-22). Over this allowance, you’ll need to pay income tax of:
- 20% on any income up to £50,270 ( The Basic Income Tax Rate)
- 40% on any income from £50,271 to £150,000 ( The Higher Income Tax Rate )
- 45% on any income over £150,000 ( The Additional Income Tax Rate)
Self-employed people pay Class 2 and 4 NICs. You pay Class 2 National Insurance directly to HMRC whereas Class 4 NICs are payable via Self Assessment. You are obliged to pay:
- Class 4 if profits are £9,568 or over a year. If they are between £9,568 and £50,270, you need to pay 9% and on the profits over £50,270, pay only 2%.
- Class 2 NICs of £3.05 a week (2021/22), if your profits are £6,515 or over in a tax year
3) Bookkeeping
As a self-employed there is nothing too complex that relates to bookkeeping, you just need to keep records of your recipes and invoices to track your income and expenditure as evidence to HMRC. Keep your all office or other business bills safe so that you may claim back them from HMRC as business expenses. You can save records via bookkeeping software or spreadsheet.
4) Claim Business Expenses
Being self-employed you can claim the following expenses from HMRC:
- Equipment
- Advertising
- Cost of stock
- Delivery charges
- Postage
- Stationery
- Heating and lighting in your business premises
- Relevant books and magazines
- Bank charges
- Telephone use
- Travel
- Rent of your business premises
- Bank charges on business accounts
5) Self Assessment Tax Return
All self-employed or sole traders in the UK are required to register for Self-Assessment. This is the method whereby information is given to HMRC to work out your income, expenses and to know you’re paying the right tax amount. After registering, you need to send a self-assessment tax return on annual basis otherwise you might be levied a penalty.
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6) Payments on Accounts
You pay some advance payments as Income Tax and Class 4 National Insurance for the future tax year. Payments on accounts need to be done if:
- Your Income Tax and Class 4 NICs are over £1,000
- You don’t pay tax at source (tax on income before you receive the payment) on more than 80% of your income
You need to make these payments on or before 31st January and 31st July.
7) VAT Registration
You need to register for VAT if your turnover is over £85,000 in a year, you receive in the UK from the EU goods over the VAT threshold (£85,000) and you expect to go over this threshold in a month. However, if you don’t fall within these circumstances, you can register for VAT voluntarily to get different advantages.
Quick Sum Up
So you are now well equipped with the relevant information about how to do accounts for self employed? By keeping the above things in view you can set up your accounts and keep track of your finances to avoid paying extra taxes and to be saved from heavy tax penalties.
If you are earning a large amount as a self-employed, you may find it difficult to do your accounts yourself. So, contact our qualified accountants, tax experts and bookkeepers to take the financial burden off your shoulders so that you can focus on growing your business!
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Disclaimer: This blog provides general information on doing your accounts as a self-employed.