"Keeping on top of tax returns can feel daunting, especially for small business owners and sole traders managing everything themselves. According to the government website, in the 2022/23 tax year, a record-breaking 11.5 million taxpayers submitted their Self Assessment tax returns by the 31st January deadline. But understanding how to navigate this isn’t as simple as filling in a form and hoping for the best, and HMRC collected a huge £220 million worth of late filing penalties in the 2022/23 tax year. We conducted a survey of 800 sole traders and self-employed UK residents which revealed some worrying knowledge gaps:

• Only three in 10 (31%) of the sole traders knew they needed to submit their self-assessment form by the 31st January
• Three in four (75%) do not know the current threshold for paying a higher tax rate of 40% (£50,271)
• Seventy-three percent were unaware that sole traders are not required to pay corporation tax 
• Nearly one in five don't currently pay into a pension scheme (18%) 
• One in five don't have a three-month salary safety net saved up (21%)

Six Self Assessment tips for sole traders and small businesses

Mark the important dates in your calendar to avoid penalties: Knowing when you need to submit your tax return can be confusing. If you didn’t do so this time, mark these important dates in your calendars this year to avoid any penalties:

• 5th October: register for self-assessment – By 5th October, following the end of the tax year you became self-employed or started your small business you need to inform HMRC by registering for self-assessment. To use HMRC government services, you’ll need a Government Gateway Account. If you already have one, you’ll need to have your user ID and password ready to log in so make sure you keep a record of your details and know how to find them ahead of the deadline. If you don't already have an account, you’ll just need to create your sign-in details. 
• 31st October: paper tax returns – If you’re filing a paper return, this must be submitted by midnight 31st October.
• 21st January: online tax returns – for online tax returns, you’ll have until midnight 31st January to submit.

If you fail to submit your return on time, you’ll usually have to pay a late penalty fee of up to £100 if it is up to three months late. You’ll also be charged interest on any late payments. If you’re later than three months, you’ll have to pay more, but HMRC will estimate the penalty. It’s important to remember that you’ll still be charged £100 for missing the initial three-month deadline.

Plan ahead for payments to avoid cash flow issues

The amount of tax you owe depends on your income and allowable expenses. You’ll also need to account for:

• National Insurance Contributions (NICs) – these include Class 2 contributions, which are a flat weekly rate, and Class 4 contributions, which are based on your profits. For example, if your annual profits exceed a certain threshold (£12,569 for the 2024/25 tax year), Class 4 contributions will apply instead of the Class 2 weekly rate for lower earners.
• Payment on account – if you’re self-employed and your tax bill exceeds £1,000, you’ll also be required to make an advance payment towards the next year’s tax bill. This is split into two instalments, due on 31st January and 31st July. Each instalment is 50% of your previous year’s tax liability.

It’s important to plan ahead for those payments to avoid cash flow issues in the future. Using a Sole Trader Tax Calculator tool, like the one from takepayments, can help you estimate your tax bill by factoring in things like your income, expenses, and tax bracket. Don’t forget that allowable expenses, such as travel costs, office overheads, and business insurance, can reduce your taxable income.

Know what information you'll need to fill in your self-assessment

If you’ve never filled out a self-assessment tax return before, the thought of tackling it can be a bit intimidating and it's important that you have all the information you'll need to fill in the form to avoid delays. To complete your tax return, you’ll need the following:

• Your National Insurance (NI) number
• Your ten-digit Unique Taxpayer Reference (UTR)
• P60 or other records showing how much income you’ve received that you’ve already paid tax on
• Records of income, including invoices, receipts, or bank statements
• Any contributions to charity or pensions that might be eligible for tax relief

Get into the habit of keeping records

Organised record-keeping is essential for a smooth tax return process. Make it a habit to store all your invoices, receipts, and important financial documents in one place, whether that’s in a physical folder or digitally. This means you can quickly and accurately input your income and expenses when it comes time to file. Specialist accounting software or apps can streamline this process as they’re designed to track expenses and automatically generate reports and insights. These can give you a big helping hand when it comes time to submit your tax return. 

This also goes for claiming all expenses you’re entitled to. Every expense directly related to running your business – such as office supplies, travel costs, and professional fees like accountant services – can reduce your taxable income, so it’s important to claim all allowable expenses. To ensure you don’t miss anything, keep detailed receipts and records throughout the year. If you’re unsure whether an expense qualifies, consult an accountant or refer to HMRC guidance.

Complete monthly reconciliations

Reconciling your accounts monthly is a proactive way to make sure your finances stay up to date and you should consider setting aside time each month to reconcile your accounts. This involves matching your income and expense records with bank statements, identifying any discrepancies, and resolving them promptly. This means you’re not only reducing that last-minute panic at the end of the year but also making your financial picture a lot clearer, meaning you can budget effectively.

Fill in your tax returns as soon as possible

Waiting until January to complete your tax return might seem tempting, but it’s risky. Filling it in early gives you time to double-check your figures, gather any missing information, and address any queries from HMRC without the stress of looming deadlines. Early filing also has cash flow benefits – you’ll know your tax liability sooner and can budget for it more effectively. For first-time filers, this extra time can be invaluable for understanding the process and avoiding any costly errors. If you left your tax return until the last minute this year, try and get ahead of the game next time.