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It’s the three-letter word that any business dreads, but the effects can be even more impactful for sole traders.
No, we’re not necessarily talking about the final bill you need to foot at the end of January. While this will always be painful, the process of organising your tax affairs as a small business is something that should not be underestimated.
Tips to Avoid Tax Mistakes
It’s a process that will encounter many mistakes, as we look at some of the biggest ones in today’s article.
Not Keeping Accurate Records
This is the most common mistake that sole traders make regarding their tax affairs.
The issue is that, as your business grows, it becomes increasingly difficult to keep on top of your paperwork. This is especially true if you’re running your business single-handedly.
Before you know it, you could be facing a mountain of receipts, invoices and other financial documents with no real system to organise them.
The solution to this problem is simple – get organised from the start and create a system to keep track of your paperwork. This could be as simple as using a folder or box to store all of your receipts and invoices.
You could also use accounting software to help you keep on top of your finances and make it easier to submit your tax return come January.
Not Understanding Expenses
Another mistake that sole traders make is not understanding which expenses are tax-deductible.
This is an important point to understand as it can make a big difference to the amount of tax you need to pay.
Generally speaking, most business-related expenses are tax-deductible. This includes things like the cost of running your office, travel expenses, insurance obligations and buying inventory.
However, some expenses are not permitted. For example, vehicle-related ones tend to slot into a grey area – and you should clarify whether you are allowed to claim before submitting your return.
It’s important to understand the difference between the two types of expenses so that you can claim back the maximum amount of money come tax time.
Not Paying Yourself
Another classic mistake is not paying yourself. This might seem like a strange point to make, but it’s an important one.
The issue is that you are technically self-employed as a sole trader. This means you are responsible for paying your income tax and National Insurance contributions.
However, many sole traders forget to do this and end up with a nasty shock come tax time. The solution to this problem is simple – set aside money each month to cover your tax and National Insurance contributions. This will ensure that you don’t end up with a bill that you can’t afford to pay.
Not Keeping Up to Date with Changes in the Law
The final mistake we’ll cover is not keeping up to date with changes in the law.
This is an important point to consider as the tax law is constantly changing. This means that what might have been tax-deductible last year might not be this year.
It’s important to stay on top of these changes to maximise your tax deductions. The best way to do this is to speak to an accountant or tax advisor who will be able to keep you up to date with the latest changes.