Going it alone as a self-employed plumber is a big step, but an exciting one at the same time. Working for yourself can be very rewarding, especially financially, but there are lots of things to consider when working for yourself. One of the biggest challenges that many people fear when taking the plunge as a sole trader is sorting out their taxes. Of course, your annual tax return doesn’t have to be the frightening prospect that it may seem and there is plenty of help available to make sure you get things right.
Let’s not pretend that tax isn’t complicated, some of the forms and pages of help provided by HMRC can seem mind-boggling if you’ve never encountered them before. If you’ve spent most of your career working for an employer and having your salary paid directly into your account with the tax already taken care of, then there’s a good chance you’ve never come across a Self Assessment Tax Return before.
As a sole trader the responsibility is on you to make sure your tax affairs are in order and to accurately declare your earnings every year so that HMRC knows how much tax you should be paying. This is the basis of the self assessment system, which has been in operation since 1997. The system works to a series of strict deadlines throughout the year and you must make sure that you complete and return your tax return on time, paying any tax that you owe, otherwise you will face financial penalties, which, if you’re just starting out as a self-employed plumber we’re sure you could do without.
But there’s no need to fear your self assessment, if you’re organised and keep to the deadlines then there’s no reason why it should be a stressful task. To make it easier, we’ve broken it down into a series of digestible steps:
Keep your books in order
Trying to scrabble together piles of disorganised receipts, invoices or even remember what you got paid for various jobs just days before the tax return deadline can be a nightmare scenario. But keep you finances organised right from the start of your sole trader career and everything can be so much simpler.
Some people choose to use accounting software, or you could use a simple spreadsheet to just record the basics such as how much you have charged a customer for each job and to record any business expenses you have during the year, such as fuel to travel between sites or tools to carry out your work. In basic terms, your tax bill is worked out by the formula of: income – expenses = profit. You then pay tax determined by the amount of profit you have made.
You may want to check out our own free bookkeeping software, which you can use to enter the values of invoices and the details of expenditure to keep a running check on your profit or loss – hopefully profits!
Keeping track of all your incomings and outgoings not only makes your tax return easier to complete, but it’s also a legal requirement and HMRC can request to inspect your books at any time, so best to get them in order straight from the beginning.
As well as keeping track of the numbers you also need to keep copies of all your important paperwork, such as invoices and receipts – as a sole trader you will be legally obligated to keep hold of them for five years and 10 months after the end of the financial year, so make sure you keep them somewhere safe.
Personal finances are important too
If you are working as a sole trader than there is a lot more crossover between your personal finances and your business finances. It is always best to keep them as separate as possible, ideally with separate bank accounts, but when it comes to self assessment you are effectively completing a personal tax return.
This means as well as keeping invoices for your work as a plumber, you’ll also need to be able to provide details of any other income earned during that financial year. It could be a salary earned in permanent employment that ended shortly before you became a sole trader. If so, you will need details of any PAYE salary, all of which should be on the P11D or P45 provided by your employer when you left.
Other income to consider could be payments from a part time job, rental income for any property you may own or even interest on any savings you might have.
Where to start with Self Assessment
According to figures from HMRC, up to 10 per cent of the nine million people who complete a Self Assessment Tax Return every year miss the deadline, so it is important that you are not in the minority, as you don’t want to fall foul of the key dates and land yourself with a hefty fine.
Don’t put off dealing with your tax return just because you think it will be complicated. As mentioned before, getting organised right from the off will greatly reduce the complications and stress that the impending tax deadlines can often cause. Each financial year ends on 5th April and you should be issued with tax return forms to complete shortly after that.
While you may have months to do it, getting started as soon as possible after the financial year ends can really ease the burden and pressure. Don’t leave it until the last minute as you won’t be leaving yourself any time to tackle issues that your paperwork may throw up. Even if you don’t receive the form to fill in, it’s your responsibility to request one or download one online, you won’t get away with not doing it so best to get it done in plenty of time.
What do I need to fill in my tax return?
We’ve put together a quick breakdown of some of the key pieces of information that you will need to be able to accurately complete your self assessment. More details are available on the HMRC website, but this list will get you started with most of what you will need:
- A P60 detailing any pay, expenses and benefits relating to your last employer, if relevant to the tax year in question
• Bank statements for the entire financial year
- Details of any cheques sent or received, usually found on your chequebook and paying-in book stubs
- Accounts for your sole trader business, with records of every payment you have received for your plumbing services and details of any expenses incurred in your line of work
- A breakdown of all your allowable expenses, including receipts or other paperwork wherever possible
- Details of other income and assets such as capital gains, dividend vouchers, investments, property or savings
Before you send any documents into HMRC, make sure you take a photocopy and send in the copies, keeping the originals safely in case you need them in future.
Getting it right is crucial
It may sound obvious, but accuracy is vital when completing your tax return. There is the SA100 Tax Return, which is the core form to fill in as part of your self assessment, but depending on your own circumstances you may also need to fill out additional pages. These can cover things such as a capital gains, rental incomes or other areas. You only need to fill in the things that are relevant to you, but it is also important that you don’t miss out anything that HMRC will see as key to your self assessment.
Often HMRC will send you the relevant forms in the first place, but if there is anything you haven’t been sent that you think you need to fill in then it is again your responsibility to make sure you get hold of the correct forms. Anything you think you need can be requested through the self assessment helpline on 0845 9000 404 or all the forms can also be found on the HMRC website.
It is also essential that you inform HMRC of any changes to your personal details or if there are any mistakes on the details that HMRC has about you. It is you who will face the penalties if your tax return is incorrect, whether that is through a mistake or oversight, or in more serious cases, through fraud.
You should usually receive a guidebook to filling in your forms correctly and there is a lot of information to help you through it on the HMRC website. But even with this advice and guidance, filling in your own tax return can still be a daunting task to those who do not have professional experience when it comes to dealing with taxes. We also know many self-employed people are put off from seeking professional help from an accountant because they are worried about how much it will cost, something that is of primary concern in the early years of your business. That is why at Easy Accountancy we have made our self assessment services for sole traders as affordable as possible. We can complete your tax return on your behalf for a flat fee of £250 and we also offer fixed fee accounting assistance throughout the year for just £60 a month, which also includes completing the necessary forms at the correct times. You can follow the link to find out more about our fixed fee service.
The tax return deadlines you need to know
The tax year ends on 5th April, after which date you should receive you tax return forms to complete covering the previous 12 months. For those who want to complete them in paper form and return them by post then they must be with HMRC by 31st October of that calendar year. Those who return it by that date will get the benefit of having HMRC calculate your tax bill for you. If you return it by post between 31st October and 30th December then your bill will still be calculated for you but there are no guarantees that you will get it back by the 31st January payment date, which means you could still face a fine for not paying the full amount on time. So stick to the 31st October deadline if you want to file your return by post.
More and more people now complete their tax returns online and in that case you will have until midnight on the 31st January to submit your forms. Software on the self assessment section on the HMRC website will help you calculate how much tax you owe and this must also be paid by the 31st January deadline too. For this reason it is best if you complete your return and submit it in plenty of time before the January deadline, that way you will have more time to ensure you have all the funds in place to pay the bill and won’t be hit with any nasty surprises about how much you owe!
At Easy Accountancy we would always encourage you to complete your tax return in plenty of time as this will cut down on the stress that often arises from leaving it until the last minute. This way you will have more time to address any potential mistakes, issues or problems submitting the information. Late submissions will be subject to an automatic £100 penalty, plus you will also be liable to pay interest on any overdue monies owed.
There are occasions when you may be entitled to an extension on the deadline. For example, if you do not receive your notice to file a tax return online by 31st October, then you will actually have three months from the date you receive the notice to file online. Such instances are rare, however, and it is best to be organised, be aware of the dates and ensure you are up to date with all your finances ahead of the tax deadlines, which remain the same every year.
Sending your tax return by post
For postal tax returns you need to be sure you have signed and dated all the appropriate pages, as well as included any relevant additional pages that apply to you. Even if an accountant is completing it on your behalf, it is your responsibility to ensure that all the correct paperwork has been sent. Be sure that you keep copies of everything sent in as well, it may get lost in the post, for example, or you may just need to refer back to the paperwork in the future.
Completing your tax return online
Millions of people now take advantage of the online tax return submission portal, which has numerous benefits for sole traders. For example, it cuts down on paperwork and eradicates the risk of your forms getting lost in the post. You get longer to complete your tax return and will also get an instant acknowledgement that your forms have been successfully submitted. You will also get an instant calculation of how much money you owe rather than waiting for a bill to arrive by post. Completing it online doesn’t mean having to sit down and do it all at once, you can save it as you go and return to it in stages. You can – and should – also save and print a copy of the tax return submitted online.
It is all done through an online portal requiring a username and password. First you need to register using your 10-digit Unique Taxpayer Reference (UTR), found on most correspondence you should have from HMRC. You will first need to request an activation PIN but it can take up to a week to arrive so make sure you register in plenty of time before the deadline.
When do I need to pay my tax bill?
As a sole trader completing your tax return for your first financial year, the first deadline for payment will be 31st January after the financial year in question. So, if you are completing your tax return for 2012/13 (which ended on 5th April 2013) then your first bill will be due on 31st January 2014.
Sole trader taxes are dealt with in three stages, which can be confusing for those unfamiliar with the system. If we look at it on the basis of completing your first ever tax return for 2012/13 then:
- on 31st January 2014 you will be expected to pay your full tax bill on any profits earned in 2012/13. In addition you will also have to make the first of your ‘payments on account’, which is essentially an advance payment against your expected tax bill for 2013/14. This will basically be 50 per cent of your 2012/13 tax bill.
- You will then be expected to make your second payment on account by 31st July, which will again be 50 per cent of your 2012/13 tax bill.
- By the time 31st January 2015 comes around, you will have to pay any additional tax owed for 2013/14 (the tax bill may have gone up if you have seen an increase in profits compared to the first year), or you will be entitled to a refund if you have paid too much tax because your profits have gone down. At the same time you will also make the first 50 per cent payment on account towards your 2014/15 tax bill.
While the figures can get confusing, your Self Assessment Statement should break down accurately the amounts that are due. This will be available online through your login if you have registered online, or you should get one by post if you have submitted your paper tax return before the 31st October deadline. Even if you don’t get a statement, it is up to you to make the appropriate payments in time so you should get help from an accountant to work out how much you would be expected to owe.
Putting money aside during the year is essential to help you manage your tax bills, otherwise it can have a damaging effect on your cash-flow when you are faced with a bill for thousands of pounds at once if you haven’t saved for it. A good approach is to put aside 30 per cent of you income throughout the year to help cover your tax and National Insurance bills when the time comes. Failing to save your money is not a valid excuse for not being able to pay on time.
What happens if you miss the deadlines
The first penalty you will receive if you are late filing your tax return is a £100 automatic fine. You may then receive an estimated tax bill from HMRC and a demand for payment for this amount, but to change it to an accurate figure you will need to submit your tax return.
Failure to pay by 31st January will also mean you start to accrue interest so your tax bill will get bigger by the day. Failing to pay by 28th February will also see an additional 5 per cent surcharge added on top, with a further 5 per cent if no payment is received by 31st July. So you really need to pay on time to ensure you are not hit with escalating costs. Legal action can then follow if you still fail to pay the necessary taxes.
Of course, if you have reasonable excuses for not filing your return on time, then these will be taken into consideration by HMRC and you can request that the £100 penalty be waived. Again, it is best to do this straight away and as soon as possible when you know you will be late in filing you return. Reasonable excuses can include things such as the loss of documents through a fire, serious illness, the death of a partner close to the deadline date, or unavoidable problems with the online filing system. Circumstances that can be considered unavoidable and beyond your control will be taken into account by HMRC but you will be expected to provide proof that you made reasonable efforts to meet your self assessment obligations.
All in all, it is best to stay organised throughout the year and keep on top of the all the paperwork relating to your self employed plumbing business. This way you will not only have a good idea of how well your business is performing but you will be in the best position to accurately complete you tax return and pay any bills you owe without being hit with fines and penalties.