Tax might not be the most exciting part of running a trade business, but getting it right is essential. Here's what every self-employed contractor needs to know about UK taxes.
Self-Assessment Basics
As a sole trader, you'll pay income tax and National Insurance on your profits. You need to register for Self Assessment with HMRC and file a tax return each year.
Key deadlines:
- 5 October: Register for Self Assessment (first year)
- 31 October: Paper tax return deadline
- 31 January: Online tax return deadline and payment due
- 31 July: Second payment on account due
Allowable Expenses
You can deduct legitimate business expenses from your profits before calculating tax. Common deductions for contractors include:
- **Vehicle costs**: Fuel, insurance, maintenance, or simplified mileage allowance
- **Tools and equipment**: Including depreciation for expensive items
- **Materials and supplies**: Anything you use on jobs
- **Insurance**: Public liability, professional indemnity, etc.
- **Phone and internet**: The business-use portion
- **Software subscriptions**: Job management, accounting software
- **Training and certification**: Courses, exams, renewals
- **Clothing**: Work uniforms and safety equipment (not regular clothes)
VAT Considerations
If your turnover exceeds £90,000 (as of 2024/25), you must register for VAT. Below this threshold, registration is optional but can be beneficial if you:
- Have significant VAT-able expenses
- Work mainly for VAT-registered businesses
Consider the Flat Rate Scheme for simpler VAT accounting.
Common Mistakes to Avoid
**1. Mixing personal and business finances**: Keep separate bank accounts. It makes tracking expenses much easier.
**2. Not keeping receipts**: HMRC can ask for evidence of expenses. Digital copies are fine.
**3. Missing payment deadlines**: Late payments incur penalties and interest. Set up reminders.
**4. Not saving for tax**: Set aside 25-30% of profits for tax. Don't spend it all.
**5. DIY when you should hire**: An accountant typically saves you more than they cost.
Record Keeping
You must keep records for at least 5 years. This includes:
- All income and sales
- Business expenses and purchases
- VAT records (if registered)
- Bank statements
Digital records are perfectly acceptable and easier to manage than paper.
Conclusion
Good tax management isn't about finding loopholes. It's about claiming all legitimate deductions, meeting deadlines, and keeping accurate records. Consider working with an accountant who understands the trades industry.