What is a Sole Trader?
If you decide to start a business by yourself and you decide not to set up a limited company, then you're a sole trader.
Being a sole trader and being self employed are exactly the same thing and you'll often hear both phrases being used.
Being a sole trader is one of the most simple ways of running a business, so it's great for those just starting out, who do not want the administration burden of setting up a limited company.
If you're self employed, you're the sole owner of your business and will keep all the profits of the business after any tax due has been paid.
On the flip side a sole trader is personally liable for any losses the business makes. So if your business fails, then you are personally responsible for any debt the business may have and your creditors can pursue you personally to recover any funds due to them.
It's also very important for sole traders to have adequate insurance cover. Should a sole trader be sued, all of their personal assets could be at risk, such as your home, car, personal savings.
This personal risk is known as unlimited liability and one of the key differences between a sole trader and a limited company. There is no legal distinction between the owner and the business.
A sole trader's business can grow to be quite large should they wish. A sole trader can employ staff and be registered for VAT.
A sole trader can also deduct any expenses which have been incurred and relate directly to their business, almost in the same way as a limited company. Expenses may well include items such as office costs, travel costs, staff costs, products you buy to sell on (stock & raw materials) and financial costs such as accountancy fees, insurance or bank charges.
Tax & NIC
Each year a sole trader must calculate the profit and loss of their business for the year. That profit is then entered into the sole traders' self assessment tax return. The sole trader then pays income tax on those profits after their personal allowance has been deducted.
The standard personal allowance for 2019/20 is £12,500. In simple terms, an individual only starts to pay tax on income received over this amount.
A sole trader also pays National Insurance Contributions (NIC). Currently sole traders pay a standard weekly charge called Class 2 NIC. In addition to this they then pay Class 4 NIC which is calculated as a % on their sole trader profits over a certain threshold.
It's also not uncommon for a sole trader to also be an employee of a different company. Many sole traders start their business as a side line to their main employment. When they are making sufficient profits, many then leave their main employed job. Details of any employments during the year are also included in the sole traders self assessment return, as well as any other income such as rent from property, income or gains from investments etc.
Being a sole trader isn't always the most tax efficient way to run a business, so as your business grows it may be worth incorporating to be more tax efficient and have protection from unlimited liability.
A sole traders accounts and self assessment tax return is simpler to prepare than those of a limited company and therefore their accountancy costs are normally lower.
We offer a range of cost effective sole trader packages starting from just £35 (plus VAT) per month.
Registering as a Sole Trader
One of the great things about being a sole trader is that it's easy to set up. All you need to do is notify HMRC that you have started to trade. This must be done within three months of starting to work for yourself. It's very simple to do and can be done online on HMRC's website.
If your business idea goes well, a sole trader can always incorporate their business into a limited company.
Find out more on how Zest Accountants can help your business. Visit www.zestaccountants.co.uk