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May 25, 2017

Sole Traders: Key dates, deductible expenses, and NICs

Self-employed sole traders are taxpayers who run their own businesses as individuals and are entitled to all business profits after tax has been paid.

If you have recently become self-employed, you should strictly register for tax and National Insurance Contributions(NICs) by 5 October following the end of the tax year in which you have started business, however it is good practice to register as soon as possible after starting trading.

Thereafter, you are required to complete and submit your self-assessment tax return by 31 January following the tax year which you started trading (or 31 October is submitting a paper return).

So, if you started trading in the 2016/17 tax year and wish to file your self-assessment tax return online, you should inform HMRC by 5 October 2017 and submit your tax return and pay the tax due by 31 January 2018.

Deductible Expenses

The amount of tax payable will be a proportion of your trading income, which is business profits less deductible expenses. Therefore, it is important for sole traders to keep clear and accurate records of the business’ sales and expenses.

When calculating your trading income, you can claim for expenses that are incurred ‘wholly and exclusively’ for the purpose of carrying out your trade. Some examples include:

  • Stock
  • Wages to employees
  • Telephone & internet costs
  • Utility bills
  • Mileage
  • Insurance
  • Relevant magazine subscriptions
  • Website costs
  • Advertising and marketing
  • Professional and legal fees

Expenses that are not deductible include private usage of motor vehicles and equipment, client entertaining, fines, and penalties.

Other expenses included in the accounts, such as depreciation and capital expenditure, are not usually allowable for tax purposes . However, a claim for capital allowances can be made instead in respect of this expenditure, enabling you to deduct some or all of the value of the item from profits before tax.

Flat Rate Deductions

Alternatively, a sole trader can choose to claim a flat rate deduction for motor expenses and any business use of their home instead of calculating the actual expenditure incurred and apportioning it between business and non-business use.

Motor Expenses

Sole traders can use the flat rate deduction to cover the cost of buying, running and maintaining the vehicle instead of capital allowances.

The first 10,000 business miles for cars and vans incurs a deduction of 45p per mile. Any miles above this amount will entitle the trader to a deduction of 25p per mile.

All business miles for a motorcycle are 24p per mile.

Business use of home

Sole traders can also claim a flat-rate deduction to cover household running costs, such as power, heat and light.

A sole trader who works 25-50 hours a month from home can claim a monthly deduction of £10. This increases to £18 where the sole trader works 51-100 hours a month from home, and £26 where they work over 100 hours from home.

A trader can decide in each period whether to claim the flat rate deduction or claim for the business use proportion of actual expenditure.

Class 2 & Class 4 NIC

Sole traders are also required to pay Class 2 and Class 4 National Insurance Contributions (NICs) on their earnings.

For 2017/18, Class 2 NICs are charged at a rate of £2.85 per week, unless profits are below the small profits threshold of £6,025 per year.

Class 4 NICs, in contrast, are charged as a percentage of your profits. If you generate profits of less than £8,164 per year you will not need to pay Class 4 NICs.

For profits of between £8,164 and £45,000 will need to pay NIC of 9% of that amount. Any profits above £42,385 will be taxed at 2%.

If you are a sole-trader who needs help with their tax return, please contact a member of our team.

Contact us today to discuss your tax requirements.
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