By definition, a sole trader refers to an individual who works in an individual capacity and traditionally speaking, does not receive a wage or a salary. The person is not directly employed either. So, if you are a sole trader, how do you pay yourself? Also, how can you pay your due tax? This article will delve into all the aspects of employment and payment if you are a sole trader. Let us dive right in!
In the capacity of a sole trader, you pay yourself according to the personal drawings from your business. In addition to that, you pay the National Insurance contributions as well as your taxes on the total profit that is made on your business. Therefore, you must be on top of your game where your bookkeeping is concerned and keep comprehensive records of all your personal drawings.
How Can You Pay Yourself from Your Business as A Sole Trader?
It is as simple as taking money from your business or company account to pay yourself from your business as a sole trader. When it comes to your sole trader finances, you must always keep a separate business account. In addition to that, as mentioned above, it is pertinent for you to keep an all-inclusive record of all of your personal drawings in addition to the outgoings and incomings. You must also do your due diligence and set the necessary amount of money aside to ensure that you can pay all your taxes on time.
In this respect, remember that you can also keep that money in your savings account so that you can earn a hefty interest on it. The only important thing is that it should always be accessible until such time as you are required to pay your taxes.
How Much Money Should You Save For Your Taxes as A Sole Trader?
You will have to pay taxes on the total profit that you make in your business as a sole trader. This profit is calculated through the Self-Assessment tax return that you are required to file every year. In simple terms, the profit of your business is the total income received by your business minus the allowable business expenses you have incurred as a sole trader. In this context, it is pertinent to mention here that the expenses you incur must only be for your business and not for your personal needs.
Naturally, you will be required to pay more taxes if your profit is higher. However, this also means that you will be earning more. If your annual profit is £50,000, you must set aside 25% of the profits for taxes. If it reaches £100,000, you must save 40% of the money for taxes. In case your profit per annum is between £100,000 and £150,000 or more, 45% of your total profits must be set aside.
It is also pertinent to mention here that sole traders must pay NI contributions if they are 16 years or above and self-employed individuals with a total profit of £6,365 yearly. Also, self-employed people are liable to pay the National Insurance for both Class 2 as well as Class 4. For the fiscal year 2019-2020, the rate for Class 2 is £3 weekly in situations where the annual profits exceed £6,365. You will also require a National Insurance Number prior to paying your NI contributions.
Is Everything You Earn from Your Business Yours?
If we consider the law, being a sole trader means that in the eyes of the law, you and your business are one and the same thing. You receive a certain income, and as an individual, you are the one who has to incur all the expenses as well as the taxes on them. It is vital to bear in mind that handling your finances as a sole trader can sometimes be a bit challenging. This is because sometimes, clients might pay you for your services a bit late and you might end up delaying the payment of your tax liabilities. In this scenario, you might have to pay hefty fines and penalties that have been set in place for delayed tax payments. Therefore, you must always save the money from your business beforehand to ensure that you do not end up on the short end of the rope later.
So, How Do You Pay Your Tax Liabilities?
The Self-Assessment tax return that you file each year will be proof of your profits to the HMRC every year. Your NICs and income tax calculation will also determine your final tax bill. It is important to remember to file Self-Assessment before 31st January every year, or you might be fined by the HMRC from anything starting £100.
Allow Limelight Accountancy to Help You with Your Taxes!
It cannot be disputed that operating as a sole trader has a lot of advantages. To begin with, you are your own boss, and you do not have to rely on or trust any other party to carry out your business operations. Also, you can decide your roles and responsibilities as well as the amount of work you wish to take up according to your wish. That said, when it comes to the bookkeeping and financial aspect of your business, things can quickly start getting tricky. Therefore, if you ever find yourself struggling, get in touch with Limelight Accountancy for effortless tax payments and advice throughout the year!