3 Accounting Tips for New Sole Traders
So, you're a new sole trader? Congratulations on your exciting new venture. Whilst you know a thing or two about the services or products you're selling, chances are you're just discovering a whole new world of accounting and taxes that come with the territory.
This blog is going to be an excellent step into this new world, guiding you through our top 3 accounting tips for new sole traders. Let's dive in, shall we?
1. Set up a separate bank account
After setting up as a Sole Trader with HMRC, you're legally not separate from your business. So setting up a separate bank account isn't technically a requirement.
That being said, we strongly advise you set up a new account for your business. Why? Because it keeps your business and personal finances separate, meaning there's no messy confusion over whether an expense is business-related or not. It allows you to easily record both your income and expenses, making the task of bookkeeping and completing your annual accounts a lot less stressful.
Make sure you're keeping all of your receipts and invoices so you are prepared when the deadline comes knocking. We're big fans of using Cloud Accounting software like Xero and Dext to lend a helping hand.
2. Start bookkeeping habits early
With so much on your plate right now, it could be tempting to put 'bookkeeping' to the back of your to-do list. However tempting it might be, we strongly recommend hitting the ground running when it comes to maintaining your accounts.
Whether that means hiring an accountant or bookkeeper from the get-go, or blocking out a few hours each month to keep updating your accounts, future you will have a lot to thank you for. Trust us, we've met our fair few distressed business owners who've left things too late - and it becomes a bit of a beast.
3. Know your numbers
Those numbers we often aren't taught about in school are so important when you begin working for yourself as a sole trader. Here's an overview to get you started.
Personal income allowance.
This is the amount of income that you can make without being taxed. It is currently (for the 2021/2022 tax year) £12,570. If you're a sole trader, you'll only pay tax over an income of £12,570.
Income tax bands.
Beyond your personal allowance, there are three income tax bands. The basic rate is 20% on income up to £50,270. The upper rate band is 40% on income from £50,271 to £150,000. The additional upper band Is 45% on any income over £150,000.
National insurance contributions. There are two types to know about.
1. Class 2. This is a flat rate of £3.05 per week, paid by anyone who earns over £6,515 whilst being self-employed.
2. Class 4. Paid on your profits, Class 4 National Insurance Contributions are 9% of annual profits between £9,568 and £50,270, then 2% on profits over £50,270 per year.
If your business' annual turnover exceeds the VAT threshold of £85,000, you'll need to register for VAT. Find out more here.
If you would like to chat in more detail about your unique circumstances, please get in touch today to book your FREE initial consultation. Give Catherine a call on 01423 431889 or email firstname.lastname@example.org.
Please note: all stats are accurate for the 2021/22 tax year.