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Preparing for your tax liabilities
What liabilities could I be liable for.....
Common taxes for sole traders are VAT and Income Tax.
Value Added Tax (VAT)
Being VAT registered is required when your turnover exceeds £85,000. This is the threshold you HAVE to register for VAT however you could opt to be VAT registered if you wanted.
The best way to prepare for this liability is to add the last 4 quarters liability and divide it by the last 12 months turnover then multiply by 100. This will give you a percentage that you can set aside each month from your invoiced turnover. An example can be seen from my last blog for Limited Companies.
Personal Income Tax
Personal income tax can be tricky - this depends on your taxable income...
Currently the tax bands are as follows
- Personal allowance (earnings between £0 - £12,570) 0%
- Basic Rate (£12,571 to £50,270) 20%
- Higher Rate (£50,271 to £125,140) 40%
- Additional Rate (over £125,140) 45%
If you are using one of my spreadsheets the first tab will show you a rough guide of your profit. This will give you and indication of what tax you need to set aside. The safest option on your first year of trading is to set aside 20% for below £50k, 40% for £50k+ and 45% for £125k of your all profit regardless.
If you use a software there will be a profit amount on your P&L report.
Just be mindful if your tax liability exceeds £1000 you are then required to pay a further 50% by January and another 50% by July to cover your Payment on Account.
This is not a fool-proof way of saving for your tax and there will be differences - however this will cover the majority of your liability and relieve some of the stress. After all if you were employed you would never have received this money anyway. So removing it before it is spent is the best practice.
*Taxes are subject to change and this is correct as of September 2023 - please seek advice from an accountant for up-to-date information.
