While checking invoices against bank statements, tallying up expenses and working out other allowances all sounds simple enough. Records must be kept for five years and they must be accurate and up to scrutiny. Once this has been worked out, then the tax return can be filed. Taxable income is gross income less the personal allowance (£12,5/22) and any other allowances and expenses. To be able to file an accurate tax return, records of business income and expenses (bookkeeping) are kept, to make it possible to work out what portion of gross income is subject to income tax and national insurance. A tax return then must be filed every year even if no profit has been made. From this point on, a self-assessment tax return must be filed (and whatever is owed must be paid) every year by 31 January. How does a sole trader account for their expenses?įirst, the trader must register as self-employed with HM Revenue and Customs (HMRC) and set up an online account. If you are a sole trader and want to know more about which expenses are considered tax deductible, then read our guide below.
These expenses do not include money taken from a business to buy personal items. The phrase to remember in relation to expenses, is that you can only claim purchases “wholly and exclusively incurred in the performance of your duties”.Īllowable business expenses are also called “running costs” – these are expenses for purchases of whatever you need to keep your business running. At CloudCo, we will ensure that as a sole trader you pay the right amount of tax and advise you on what expenditures can be offset against your taxable profits.Ī sole trader should claim allowable business expenses to avoid paying more tax than necessary. This is why it is important to have a handle on your expenses to ensure that you are being taxed efficiently. If you operate as a sole trader, then you need to be knowledgeable about your tax requirements.