New research from leading card payments provider takepayments shows that 75% of UK sole traders are unsure of the current tax thresholds that apply to them — and it could be costing them.
Their survey of 800 sole traders revealed several gaps in the financial knowledge of small UK businesses. It showed that 3 in 4 (75%) sole traders do not know at what earnings threshold they’ll pay a higher tax rate of 40% (£50,271) and that less than 1 in 10 (9%) know what could happen if they didn’t pay their tax bill: 1 in 50 thought nothing would happen at all.
Which sole traders are the most and least informed about tax?
When asked what the threshold was for sole traders to pay the Higher Income tax rate, lawyers were most likely to know the answer, with more than half (53%) answering correctly. Retailers were the least likely to know: just 13% gave the correct answer.
Overall, only 3 in 10 (31%) of sole traders knew when they needed to submit their self-assessment tax form (31st January). However, real estate agents were far below average, with only 1 in 4 (23%) able to answer correctly. Law professionals were again the best informed, albeit not setting a high bar, with only 42% getting the answer right.
Unlike limited liability companies, sole traders are not required to pay corporation tax. However, the majority of respondents were unaware of this and 73% believe that they need to pay this tax.
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How good are sole traders at saving and budgeting?
The takepayments survey also asked businesses about their saving habits.
Nearly 1 in 5 (18%) sole traders don’t pay into a pension scheme. London-based and Welsh traders were most likely to pay into a pension scheme, with 92% of traders from each saying they paid contributions. The least likely was the East of England, where only 55% of traders had a pension scheme.
Worryingly, 21% of respondents admitted that they did not currently have at least three months’ salary saved as a safety net, leaving them vulnerable to fluctuating markets and the current economic challenges in the UK.
But while Welsh traders boasted the highest pension contributions, they were the worst UK region when it came to saving: 1 in 3 (36%) did not have at least 3 months’ salary saved.
Much of this stemmed from how businesses were choosing to invest their income. Restaurants and catering traders were most likely to put at least 20% of their income back into their business (96%), whereas those in education (private tutors, for example) were the least likely, with 1 in 4 (24%) not reinvesting. These businesses were also the least likely to have a monthly budget.
“It’s not surprising that many small business owners are unsure of the legal obligations they have regarding things like tax and VAT,” said Jodie Wilkinson, Head of Strategic Partnerships at takepayments. “The rules can be quite difficult to understand, especially if you just want to focus on growing your business.”