Self-Employment Tax: Common Mistakes That Cost Sole Traders Money

Self-employment remains one of the most flexible ways to work in the UK, but it also brings tax responsibilities that are easy to underestimate. Each year, Rothstone Accountants sees capable business owners caught out by avoidable errors in their self-employment tax affairs – often leading to unexpected bills, penalties, or HMRC enquiries.

This article explains how self-employment tax works, the most common mistakes we see in practice, and what sole traders should be doing now to stay compliant and tax-efficient.

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How Self-Employment Tax Works in the UK

If you are self-employed as a sole trader, you are taxed on your business profits, not on the money you withdraw from the business. Your profits are subject to:

• Income Tax

• Class 2 National Insurance (where applicable)

• Class 4 National Insurance

These are reported annually via a Self Assessment tax return to HM Revenue & Customs.

For most sole traders, the tax year runs from 6 April to 5 April, with the main tax payment due by 31 January following the end of the tax year.

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Common Self-Employment Tax Mistakes

1. Not Registering for Self Assessment on Time

One of the most basic – and surprisingly common – errors is failing to register as self-employed promptly.

You must register by 5 October following the end of the tax year in which you first started trading. Missing this deadline can trigger penalties, even if no tax is ultimately due.

This often affects:

• Side-hustles that “grew quicker than expected”

• Freelancers moving from employment into contracting

• Online sellers who don’t realise HMRC considers them trading

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2. Confusing Turnover With Profit

Tax is due on profit, not total income. However, many sole traders either:

• Overpay tax by failing to claim allowable expenses, or

• Underpay by deducting costs that are not permitted

Common problem areas include:

• Personal use elements of mobile phones and vehicles

• Home office claims calculated incorrectly

• Treating capital items as day-to-day expenses

At the time of writing, HMRC guidance is clear that expenses must be “wholly and exclusively” for business purposes, with apportionment required where there is mixed use.

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3. Poor Record-Keeping

Inadequate bookkeeping is one of the fastest ways to create tax problems.

Typical issues we see include:

• Missing receipts

• Bank statements used instead of proper records

• No separation between personal and business spending

• Inconsistent income tracking

Aside from increasing the risk of errors, poor records make it far harder to defend figures if HMRC raise queries later.

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4. Forgetting About Payments on Account

Payments on account regularly catch out first-time filers.

If your Self Assessment tax bill exceeds £1,000, HMRC usually requires:

• 50% of the current year’s bill paid in advance, twice yearly

• Due on 31 January and 31 July

This is not extra tax, but it can feel like it if you are unprepared. Cash-flow planning is essential once payments on account apply.

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5. Missing Tax Deadlines

Late filing and late payment penalties add up quickly.

Key deadlines include:

• 31 October – paper tax returns

• 31 January – online tax return and balancing payment

• 31 July – second payment on account (if applicable)

Interest also accrues on overdue tax, which is often overlooked until HMRC statements arrive.

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6. Assuming Small Income Means “No Tax”

There is a common misconception that small or irregular income does not need to be declared.

In reality:

• Trading income over £1,000 in a tax year usually needs reporting

• Even below this level, registration may still be required depending on circumstances

• Other income (employment, rental, dividends) can push total tax liability higher

This is an area where “I didn’t realise” is unlikely to be accepted as a defence by HMRC.

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7. Ignoring National Insurance

National Insurance is frequently misunderstood by sole traders.

Depending on profits:

• Class 2 National Insurance may apply

• Class 4 National Insurance applies once profits exceed the relevant threshold

Failing to account for NIC can lead to underpayments and unexpected balances due at 31 January.

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What’s Changed in Recent Years

• Increased focus by HMRC on the gig economy and online platforms

• Greater use of data matching and third-party reporting

• Tighter scrutiny of expense claims and loss-making businesses

While Making Tax Digital for Income Tax has been delayed, HMRC’s direction of travel is clearly towards more frequent reporting and digital records.

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What Still Applies

Despite changes, some fundamentals remain unchanged:

• You are responsible for calculating and paying your own tax

• Good records are your first line of defence

• Estimates and “best guesses” are not acceptable substitutes for evidence

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What Self-Employed Business Owners Should Do Now

To stay compliant and avoid common mistakes:

• Register for Self Assessment as soon as trading starts

• Keep clear, up-to-date records throughout the year

• Set aside tax regularly rather than relying on year-end estimates

• Review expenses carefully against HMRC guidance

• Seek advice early if profits fluctuate or multiple income sources apply

At Rothstone Accountants, we regularly help sole traders correct historic errors, deal with HMRC queries, and put proper systems in place to avoid repeat issues.

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Final Thoughts

Self-employment tax does not need to be stressful, but it does require structure and attention to detail. Most problems arise not from complex rules, but from small oversights that compound over time.

If you are unsure whether you are handling your self-employment tax correctly, or if your circumstances have changed, it is always sensible to seek tailored professional advice based on your specific situation.