Posted: Thu 31st Aug 2023
In the UK, there are four different ways you can set up your business for tax purposes. They are sole trader, partnership, limited liability partnership (LLP) and limited company.
Here, we look at what it means to be a sole trader and the registration process involved.
What is a sole trader?
This is the most straightforward way to structure a business, and it’s for individuals who are running their business on their own. If it’s just you, your computer and your dogs (who don’t count as business partners, by the way), this type of business could be for you.
If you wake up one morning and decide to start selling cut flowers from the bottom of your garden, that’s it: you’re now a sole trader.
Why do I need to register as a sole trader?
It’s the law. You should register with HM Revenue & Customs (HMRC) as soon as you become self-employed, but certainly within three months. This applies even if you’re only working for yourself part-time. Unfortunately you can’t register in advance of starting your business.
The deadline for registering with HMRC is 5 October following the end of the tax year in which you went into self-employment. The tax year runs from 6 April to 5 April the following year. If you don’t register on time, or don’t register at all, you’ll likely receive a fine.
How do I register as a sole trader?
To tell HMRC that you’re in business, you can:
phone 0300 200 3500
When you register as self-employed, HMRC will automatically set up an online account for your self assessment (see What is self-assessment? below). You’ll be sent a unique tax reference (UTR) number, which you’ll need to quote when completing your self assessment and whenever you get in contact with HMRC.
And that’s it. You don’t have to register with anyone else.
What is Self Assessment?
Self Assessment is the government’s system for managing income tax, VAT and National Insurance payments. As a sole trader, you use it to file your yearly tax returns and make the payments you owe.
When you’re self-employed, you must complete a self-assessment form each year. This tells HMRC your business’s income and expenses for the previous tax year. You must pay any money you owe for the tax year by the following 31 January.
What taxes do I pay as a sole trader?
You’ll pay income tax and National Insurance (and VAT, if you’re VAT registered). It’s similar to having these payments deducted from your salary when you’re an employee, although as a sole trader you only pay twice a year rather than monthly.
The amount you pay depends on the profits your business makes. With National Insurance, you pay Class 4 contributions if your profits are £12,570 or more a year. HMRC collects these payments at the same time as your tax, via self assessment.
Unless your business is very small (and makes £6,725 or less for the year), you’ll also pay Class 2 NICs. This is charged at a flat rate per week and isn’t worked out on your level of profit.
As a sole trader, you can use a cash accounting method. This means you only pay income tax on the money that comes in and goes out of your business during the tax year. To reduce the amount of income tax you pay, you can deduct expenses for business items like vehicles and computers, as well as everyday running costs (energy bills, for example).
*Figures correct at the time of writing
What are the advantages of being a sole trader?
The business is simple to set up and run.
There’s much less paperwork than if you set up as a partnership, LLP or limited company.
You don't have to put your address on any business documents – except the invoices you issue to your customers. This helps keep your details private, especially if you’re working from home.
When you’re working out your taxes, if your business makes a loss in its first few years of trading, you can offset them against your other income in current or previous years. This means you may get an upfront tax rebate, which can help with your business’s cash flow.
What are the disadvantages of being a sole trader?
Legally, there’s no difference between you and your business. You are the business. So if someone sues the business, they’re suing you. This means that in the absolutely worst-case scenario, you could risk losing your home, your car and other personal belongings.
And as a sole trader, you can pay more tax than you would if you ran your business through a limited company.
Is being a sole trader the same as being self-employed?
Yes. Although a freelancer isn’t necessarily a sole trader, and some freelancers run their own limited companies.
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