Everything you need to know as a sole trader
Ok, this really isn’t as scary as it seems – I promise. I’ve broken everything down in this blog to make it as easy as possible.
Ok, let’s jump in…
What is it and when is it?
MTD for Income Tax (also known as MTD for ITSA) is a new way for sole traders & landlords to report earnings to HMRC.
Any self employed workers or landlords whose gross turnover (that’s total income without deducting any expenses) is over £10,000 will come under this new regime.
This comes in on the 6th April 2024.
What does this mean for me?
- You’ll need to keep records of your transactions digitally. I.e. on accounting software or excel
- An income and expense update for each business you own will need to be sent to HMRC via compatible software every quarter. You’ll have a month to prepare this after the quarter-end date.
- This will enable HRMC to give you an up-to-date estimate of the income tax you owe
- To wrap up the tax year you’ll need to submit an end-of-period statement (EPOS). This is where you can make adjustments needed to the income & expense amounts you’ve already submitted in the year. For example, you might update to add in the working at-home allowance. This has to be submitted 9 months after the end of the tax year (i.e. 31st Jan)
- You will also need to submit an Annual Declaration by the same date which effectively replaces the current Self Assessment. This is where you’ll detail all your other incomes, tax reliefs etc.
- The key differences to the current system are you will have to submit via compatible software and you’ll now be submitting quarterly.
What should I be doing to prepare?
Firstly don’t panic!
Time is on your side – get thinking about what this means for you now and put processes in place before 2024 so your not having to juggle new processes/software & MTD
Accounting software – consider whether you need to make the investment if you haven’t already. Our clients all work with Xero or FreeAgent (both MTD ITSA compatible) and it makes life so much easier.
Talk to your accountant – having a good relationship with your accountant, someone who really understands your business is going to be key to making the transition as smooth as possible.
If you currently do all your accounts & self-assessment by yourself, consider booking in a power hour with an accountant so you can get a good understanding of the changes and what more will be required of you going forward.
Let’s look at the good points!
Ultimately this is all about using software to capture your financial data and that is a GREAT thing! Utilising technology means you can automate more work which allows you to do more of what you do best!
Also, software like Xero/FreeAgent can run really useful reports to show you how you’re tracking on things like sales or profit in real-time.
Yes, you’re going to have to report quarterly but if you get systems set up that push invoices/receipts into your accounting software then you’re going to be most of the way there.
Plus in doing this you’ll have a really good view of what tax you owe all year around #winning
Things to take away
- Accounting software is going to be key. Look at software that will help you automate part of the process so you can focus on what you do best. We use Xero & FreeAgent at Hummingbird Finance and then a combination of Hubdoc and Dext for automating the receipt/invoice capture
- Make sure you have a great relationship with your accountant. If your accountant knows your business well they’ll be able to make the transition smooth and won’t need to be asking so many questions every quarter.
- If you have a busy season, e.g. the summer for wedding businesses then consider getting some extra support in this time like a bookkeeper or really get your automation set up so you don’t have to do a lot to finalise the return.
- Don’t bury your head in the sand – speak to an accountant and start planning today. If you want some help with any of the above just get in contact – book a free discovery call.
Not sure where to start?
Grab my free guide to bossing your finances and saving for tax!