If you’re just starting out and looking at which business model would suit you best, one of your options is to operate as a sole trader. But what does being a sole trader actually mean and is it right for you?

In this blog we explore just that to help you make the right decision for your business.

What is a sole trader?

A person who is self-employed and owns and runs their business as an individual. Being a sole trader means that your business isn’t classed as a separate legal entity from you.

Business control

As a sole trader you have total control over your business, its assets and profits once you’ve paid the tax due. There are also a number of other benefits to becoming a sole trader, such as it being a relatively simple and straightforward way of running your business.

There are, however, downfalls to using this trading method. For example, if you decided to form your own Limited Company your business is classed as a separate legal entity, and therefore your personal finances and liabilities are kept separate from your personal dealings. As a sole trader you don’t form a separate legal entity and therefore you’re liable for any and all of the business risk.

What are the characteristics of a sole trader?

One of the main characteristics of being a sole trader is that you’ll operate both the working and business sides yourself, so there is little to no differentiation between the management and ownership of your business.

What are a sole trader’s obligations?

Whilst there’s no obligation to file accounts or documentation with Companies House, you must register with HMRC. You’ll need to pay income tax on your business’ profits, and National Insurance Contributions (NIC). You will also be required to complete an annual self-assessment tax return, and register for VAT if you earn over £85,000 per year.

What makes you a sole trader and what’s the difference between self-employment?

For tax purposes, a sole trader is always considered as self-employed, but in the same breath not everyone who’s classed as self-employed is a sole trader. In the eyes of HMRC being self-employed means you don’t pay tax through PAYE and you’re therefore not employed by anyone. If you’re self-employed you’ll usually either operate through your own Limited Company, be part of a partnership, or use a sole trader structure.

Sole trader profession examples

The sole trader business structure is traditionally used by (but not limited to) those professionals who operate within the services sector. Such as:

  • Plumbers
  • Painters and decorators
  • Hairdressers
  • Personal trainers and fitness instructors
  • Freelance creatives (copywriters, graphic designers)
  • Private tutors
  • Gardeners

What if you want to employ staff?

As a sole trader you’re able to employ casual, part-time or even full-time basis employees. As their employer you will be responsible for collecting their income tax and NIC, and ensuring that it’s paid to HMRC. In order to do so you’ll need to operate a PAYE payroll scheme, which your accountant will be able to advise and help you with.

What are your legal obligations?

Whilst setting up as a sole trader is the easiest and quickest way to get going, there are certain legal obligations and responsibilities which you must adhere to:

  • Self-assessment tax return – you’ll need to file an annual self-assessment tax return at the end of every tax year (April 5th). Your assessment will highlight the amount of tax that’s due on your profits, and that amount will be due for payment by January 31st the following year. To file your assessment you’ll need to submit a record of your expenses, sales and receipts as well as other relevant records. Again, your accountant will be able to advise you on what’s expected of you, and ensure you’re keeping on top of things.
  • National Insurance Contributions – As a sole trader you’ll need to pay both Class 2 and Class 4 NIC. Class 4 NIC is calculated as a percentage of your profits automatically once a year, and is included in your taxes when you complete your tax return. Class 2 NIC is a flat rate contribution which is calculated weekly. You must register for Class 2 NIC, or you’ll end up having to pay whatever’s due in one lump sum at a future date. Registering for Class 2 also means you’ll be eligible for state benefits, and payment can usually be done through your self-assessment.
  • Check with your accountant if you need to register for VAT- Registering for VAT is optional if your turnover is below £85,000, and mandatory if you exceed that amount.

By registering you’ll need to keep your bookkeeping records up-to-date and file a VAT return. You’re able to register for VAT online, and by doing so you’ll be given your VAT number, and online VAT account which you’re able to file your VAT return through.

Be advised that if your turnover is still below £85,000 and you plan to do business with other businesses, it’s advisable that you still register for VAT. By doing so you’ll be able to claim the VAT back on business-related purchases and pass the VAT onto your clients, without the need to charge more for your service.

Generally it’s also considered that those sole traders who are VAT registered tend to carry a more professional image than those who aren’t.

  • You’ll need to register for PAYE if you employ any staff – as previously mentioned should you decide to employ staff on any basis, legally you’ll need to be registered for PAYE in order to collect income tax and NIC from your employees, which are then paid directly to HMRC. You can do so by registering online for a PAYE reference number and set up a workplace pension scheme. Your accountant will be able to advise you on all of this. Be aware that by employing staff you’ll also need to get employer’s liability cover, pension payments, holiday and paternity / maternity pay and be responsible for ensuring your workplace is safe.

How can Vantage Accounting help?

Here at Vantage we help sole traders every day. From ensuring all the legal bits are taken care of, to helping you save more of your hard-earned income, we can help you get started. We can also advise you on which trading model we believe is best for both your personal and professional goals. We know tax inside out so you don’t have to, so get in touch today to find out more.