How long must you keep financial records for when you’re self employed?

Self-employment remains a very popular choice. In 1975, about 8% of UK workers were “solo self-employed” (ie sole traders or limited company owner-managers with no employees). However, by 2019, that percentage had risen to more than 14% (source: Institute for Fiscal Studies).

According to government figures, the UK now has 3.5m sole traders (the most common type of self-employment), making up almost 60% of the total UK business population (6m). Many sole traders are freelancers, contractors or agency workers earning their living in a wide variety of sectors.

The UK also has about 414,000 ordinary partnerships (7%) and like sole traders, ordinary business partners must also register for Self Assessment (the system HMRC uses to collect tax), as must landlords and others who earn additional income.

What records must you keep when you’re a sole trader?

You must keep financial records that detail your earnings/income/sales and costs/expenses as a sole trader. Not only can you then reliably complete your Self Assessment tax return and pay tax that you owe, but HMRC can also ask to see your records as proof of any figures entered in your tax returns.

You don’t submit your full financial records to HMRC, rather you summarise them in your annual Self Assessment tax return. HMRC then uses this information to work out how much tax you owe, after any allowances or Income Tax reliefs are accounted for.

HMRC does not have any hard and fast rules on how you must keep financial records as a sole trader. You can keep them on paper or create your own computer spreadsheets. However, using reputable accounting or bookkeeping software can save you lots of time and reduce the likelihood of mistakes.

Moreover, HMRC is in the process of digitising the UK tax system (Making Tax Digital), which will mean sole traders will need to report figures online to HMRC every quarter and finalise them at the end of the year. Finding bookkeeping software that is or will be MTD-compliant is recommended. From April 2023, you’ll need to keep digital records if you fall within MTD for Income Tax if turnover more than £10,000 a year.

Need to know! HMRC can charge you a penalty of up to £3,000 for failing to keep or maintain adequate financial records. Penalties for underpayment of tax can also be due.

What financial records must sole traders keep?

Sole traders must keep records of all sales made or income received, which may include till rolls for some and invoices for others.

They must also detail their running costs/outgoings/allowable expenses – which must be “wholly and exclusively” incurred for legitimate business reasons. Sales receipts and invoices should be retained as proof of purchase, even for seemingly minor purchases, because HMRC can ask to see these.

If you’re a sole trader and your “VATable” sales exceed the threshold (£85k a year), you’ll need to register for VAT and maintain detailed VAT records.

Sole traders can employ others, in which case they need to keep PAYE (Pay As You Earn) records. These must show that you’ve reported accurately and you need to keep them for three years from the end of the tax year they relate to. HMRC can check your records to make sure you’re paying the right amount of tax reported on the Real Time Information (RTI) submission.

Need to know! There are apps that allow you to use your phone to photograph and store receipts, which can make the process less arduous.

For how long should you keep your records?

You must keep your financial records for at least five years after the 31 January Self Assessment tax return submission deadline of the relevant tax year. At any time before that, HMRC may seek to check your records to make sure the figures are accurate and that you’re paying the right amount of tax.

So, if you send your 2020 to 2021 tax return online by 31 January 2022, you must keep your records until at least the end of January 2027.

The rules are different for very late tax returns. If you submit yours more than four years after the deadline, you must keep your records for 15 months after you file your tax return.

Need to know! If your records are lost, stolen or destroyed, you can either provide estimated or provisional figures (while you’re compiling actual figures. You need to tell HMRC this when filing your Self Assessment tax return.

What is the income tax personal allowance for 2020?

WHAT IS A PERSONAL TAX ALLOWANCE?

Much to the disappointment of HMRC, every tax year most UK taxpayers are entitled to a UK personal allowance on their taxable income. To put it simply, most people can receive a certain amount of money before having to pay any income tax. This is what is known as a personal tax allowance.

If you’re struggling to get your head around personal tax allowances, GoSimpleTax is here to explain everything you need to know, simply and easily.

HOW MUCH IS THE STANDARD PERSONAL TAX ALLOWANCE?

The standard personal tax allowance amount is £12,500 for 2019/2020. Any income you earn after that will be taxable. The amount of tax you pay after your personal allowance is dependent on how much you earn during a tax year. For example, If your income is above £100,000, basic personal allowance is reduced by £1 for each £2 you earn over the £100,000 limit, irrespective of age.

Personal Allowance & Tax Thresholds

Personal Tax Allowance2018/20192019/2020
Tax-free personal allowance£11,850£12,500
Basic Tax Rate (20%)£1-£34,500 (after allowance)£1-£37,500 (after allowance)
Higher Tax Rate (40%)Income over £34,500Income over £37,500
Additional Tax Rate (45%)Income over £150,000Income over £150,000

If your tax affairs are a little more complex, for example, if you’re married or in a civil partnership and receive a marriage allowance, or for age-related or income-related reasons, then your personal allowance works a little differently. You could also receive tax-free allowances for:

  • your first £1,000 of income from self-employment
  • your first £1,000 of income from property you rent

HOW DO I GET MY PERSONAL ALLOWANCE?

Getting your personal allowance is simple. If you file a self-assessment tax return, you will automatically receive your tax-free personal allowance.

Is there an easier way to file?

If you need to file a tax return, GoSimpleTax is here to make things unbelievably simple. Forget about long-winded form-filling and unwelcome phone calls with HMRC. Simply enter the details of your income and expenses and we’ll create your tax return for you and submit it online directly to HMRC. 

Access GoSimpleTax and discover a new free way of filing your return (HMRC approved), know what expenses will help you lower your tax bill and keep all your records online, safe & sound. Ready to file with one click. Start your free trial today!

Do I need an accountant to do my tax return?

When you realise you have to submit a tax return, you’ll have a lot of questions. ‘When is it due?’ and ‘What do I include?’ will probably be on your list. The one at the very top of it will likely be, ‘Do I need an accountant for a watertight tax return?’.

Some people undertake the DIY method, but doing your taxes for the first time can be scary. Here, we take a look at the benefits and drawbacks of outsourcing this task to an accountant. With the advent of mobile tax software, you may want to avoid them altogether…

WHAT IS A TAX RETURN ACCOUNTANT?

An accountant does many tasks for the taxpayer, and the tax return is one of the biggest – they will file it for you on an annual basis. Other duties include:

  • Keeping on top of your books
  • Claiming expenses
  • Calculating the tax owed
  • Finding savings to reduce your tax liability

HOW MUCH DOES A TAX RETURN ACCOUNTANT COST?

As with any service, a low cost is unlikely to get you great value for money. How much you should pay for a tax return accountant will depend on the amount of work they do for you, but you can easily pay up to £500 for the service described above.

You might find that some quotes are fixed and offer you more services than you require. Additionally, the cost may differ according to the type of tax return you need, and there are specific requirements related to your circumstances too – a general self-employed tax return will be different to that of a sole trader who also has a job or rental income, for example.

DO I NEED AN ACCOUNTANT?

No – GoSimpleTax allows you to easily stay on top of your taxes without the use of an accountant. Our no-jargon tax return software helps you understand and learn how to do your own Self Assessment tax return in minutes, just like an expert.

GoSimpleTax keeps things super simple and enables you to discover tax savings you didn’t even know existed. Just ask Liam, one of our users – he was able to reduce his tax liability by claiming for homeworking costs.

Whether you have a good grasp on your tax savings or you’re clueless when it comes to tax, GoSimpleTax will make sense of everything for you. It means you’ll potentially save hundreds of pounds in accounting fees, whilst still fulfilling your tax obligations and maximising your take-home pay. 

SUBMIT YOUR SELF-EMPLOYED TAX RETURN WITH GOSIMPLETAX

Tax return software is about three things: accuracy, convenience, and zero confusion.

Our Self Assessment software gives you full visibility over your finances. You can see everything in real time and from any device, including your tax liability. It also provides you with tax-saving suggestions by revealing deductible items that will automatically save you money.

‘Do I need an accountant to do my tax return?’ Not with Self Assessment software. GoSimpleTax allows anyone to be a tax expert. Find out for yourself by signing up for our free trial. You can use it to start calculating your tax bill straight away – no credit card required.

Do I Have To Pay Tax As An Online Seller? Guidelines And Boundaries

HMRC believe that, while it is perfectly okay to sell online, individuals often breach boundaries where they are making what constitutes a ‘business profit’. In this case, they may owe tax on profit made through selling on sites like eBay or Depop – and HMRC expects you to disclose such information in your annual Self Assessment return.

Declaring extra income to HMRC can be frustrating if you aren’t confident where you stand. But attempting to operate as an online seller and covering up what could be defined as trade can be potentially devastating for your finances.

That’s why we’ve provided guidance on paying taxes as an online seller.

Do I need to pay taxes if I’m on online seller?

In 2016, the Finance Act empowered HMRC with ‘snooping’ authority to compile information from internet selling sites on ‘self-employed’ individuals who aren’t declaring income. There are certain elements to online selling that the government considers before defining something as a trade. They are:

  • Intention to make a profit as opposed to selling for fun or raise small emergency funds
  • Repetition of similar transactions over a short period of time
  • Money is borrowed to buy an item intended for sale, only to be repaid once the transaction has cleared
  • Inability to prove the items sold gave you a ‘pride of possession’ before being listed
  • The item is sold at a fixed price in a similar fashion to retailers
  • Limited time between purchase and selling, bringing into question the ownership of the seller
  • Modification of items in order to sell them for a greater profit.

For those still asking, “do you have to pay taxes on an online business?”, yes – unless you feel that you aren’t necessarily breaching the above considerations.

How much can you sell on eBay before you have to pay taxes?

HMRC does not want to tax those just hoping to make a small amount on the side. In fact, in 2017, the government agreed to a trading allowance that gave sellers the freedom to earn up to £1,000 in sales without paying anything in tax. The aim was to simplify the tax system and to help the UK “become leaders in the digital and sharing economy”.

It’s not just Ebay sellers that need to be aware of the potential tax trap, Depop, for instance, is a fast-growing community of young sellers that are making a living out of second-hand fashion. There are entrepreneurs earning thousands on the platform, unaware that they may have to pay tax as a sole trader. Gumtree and Etsy sellers are similarly affected by taxes when you sell things online – all being recognised as platforms where sellers are able to evade paying tax, and are therefore in HMRC’s firing line.

What are the consequences of not disclosing online income?

In the more severe cases, online tax evasion could result in prison – as was the case with a user in 2014 who failed to declare their eBay income. As HMRC has the authority to access PayPal information and request extensive details from online auctioning sites, it’s unlikely that such schemes will remain hidden for the foreseeable future. In 2016, approximately 870,000 people failed to submit a Self Assessment return with some cases having noticeably small amounts of income from online sales. This resulted in huge fines for the sellers, with HMRC predicting an increase for years to come.

Thankfully, completing a Self Assessment tax return has never been so straightforward. With GoSimpleTax software, you can see clearly what you need to disclose and how to avoid HMRC penalties. Our online and telephone support can guide you through the Self Assessment process so that it is accurate and transparent.

Interested? Trial our software to see how you can streamline your accounts.

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