More and more people are now doing extra work in their free time. This might involve opening an online shop via eBay, or simply doing more of the same work you do in your day job but on a private, freelance basis. Whatever type of extra work you do, it can provide extra income and better financial stability. However, many people are unsure where this leaves them from a financial and legal standpoint, especially where issues such as tax and accounting are concerned.
A key point to understand is that any source of income or paid work, even if it is only in your free time, counts as a business for legal purposes. This means that you have to register with HMRC, keep adequate sole trader accounts, and complete a yearly personal tax return in which you declare your income from the business.
Your Income is Taxable
The key point to take away from the fact that your activities are classed as a business is that your income is eligible for tax. This means that an annual personal tax return is essential, and failure to complete it on time can result in a fine. It is also important to ensure that your sole trader accounts are kept properly. This ensures that all information declared on your personal tax return is correct and the right amount of tax is paid. Over- or underpaying tax can create problems later.
Like any other business, you are entitled to tax relief on any expenses that are incurred in the running of your business, such as advertising or buying stock. This ensures that you are taxed only on profit, rather than on every penny you earn without taking running costs into account. It is important to ensure all eligible expenses are properly entered into your sole trader accounts, and that this information is submitted each year into your personal tax return. It is also important to understand that not all expenses will be eligible for full tax relief. Long-term purchases such as equipment may be counted as capital gains, with tax relief split over a number of years. If you are unsure about the issue of expenses, professional tax advice can help you know what should be recorded and how.
Do you Need an Accountant?
Most sole traders who operate full-time will benefit from having their sole trader accounts handled by a professional, but when you are just running a side business in your spare time this can be a little more unclear. To an extent, it will depend on the amount you earn and the complexity of your sole trader accounts. However, a professional can be a big help in ensuring everything is compliant. Even if you handle some tasks yourself, you may want to entrust your personal tax return to a professional in order to make sure it is completed correctly.