These two types of businesses fall under Self Assessment. A sole trader is an individual running a business and a partnership is more than one individual running a business together.
To let HMRC know you are in business, you need to register for self assessment as a sole trader / partner in a partnership and if you are running a partnership, you will also need to register the partnership.
The deadline to register is 5 October in the year in which the sole trader or partnership business started.
When you register for self assessment, HMRC will expect you to file self assessment tax returns and pay any tax due by 31 January following the end of the tax year. A tax year runs from 6 April to 5 April.
If your liability is more than £1,000, you will also need to start making payments on account towards your next tax bill. This is calculated as 50% of the liability and there are two payments to be made in a tax year (one in January and one in July).
A sole trader or partner will be liable to tax, Class 2 national insurance and Class 4 national insurance contributions. Class 2 national insurance contribution is calculated at £3.05 per week (2020-21) if taxable profits are above £6,475. This contribution counts towards entitlement to state pension. Class 4 national insurance contributions are calculated at the rate of 9% on taxable profits between £9,501 and £50,000 and 2% on profits above £50,000.
It is very important to not only understand your duty as a sole trader or partner to file a personal tax return once a year and pay any liabilities due, but you must ensure the paperwork you keep supports any returns submitted. This paperwork needs to be kept for 6 years.
If you want to know more about self assessment or need help registering and filing a self assessment tax return, book a FREE consultation.