Setting yourself up as a sole trader is a straightforward process and the simplest way to start a business. This article will give you an overview of what it means to be a sole trader and your responsibilities.
What is a sole trader?
A sole trader is an individual who trades on his/her own on a self-employed basis. If you start working for yourself as a sole trader, you will own and run your business as an individual and will keep all the business’s profits after taxes.
There is no legal distinction between a sole trader and his/her business. A sole trader will be:
responsible personally for any debts of the business
Low setup costs. Setting up as a sole trader is a fairly straightforward process and requires less professional help than if you were forming a limited company. Also when setting up as a sole trader there is no need to pay fees to Companies House.
Simpler accounting. The accounting process is much more straightforward if you’re registered as a sole trader. You’ll need to submit a self assessment tax return, but there will be no need to file annual accounts or a Corporation Tax Return
Claiming allowances. You can claim capital allowances when you buy assets that you keep to use in your business, e.g. equipment, machinery or business vehicles
Keeping the profits. As a sole trader, you can keep all profits (rather than having to share with partners)
Privacy. A limited company’s published accounts can be accessed and viewed from records held at Companies House. As a sole trader, your personal details and financial information are not published and therefore remain private.
Video: Should I register as a limited company or a sole trader?
This video explains the benefits of trading as a limited company, explaining the differences between sole traders and limited companies and the various ways that a limited company can protect small business owners and inspire confidence in their businesses.
How do I earn income as a sole trader?
As a sole trader, you will earn your income by carrying out your trade.
Your salary will be drawings which are taken out of the business. As a small business owner, you should pay yourself at least enough to live on. It’s also advisable to draw a regular salary – waiting to take money out only when you need it and then taking out a large amount could catch the attention of HMRC.
While you won’t pay tax on any drawings taken, tax will be assessed on the profits of the business. It is vital to ensure you leave enough money to pay the tax on profits. If you think your profits for the year will be less than £50,000, then keep 20% of your total earnings aside for tax. If profits are more than this, you will need to hold over a higher percentage.
The tax due on the profit that you make (simply put, the sales that you make less your business expenses) will be reported to HMRC through self-assessment. The deadline for filing your return and paying your tax will be 31 January following the tax year that your accounts fall in. You may need to make payments on account – if you use accounting software this will calculate these for you if they are due.
Your accountant will be able to advise you on how best to take your drawings and your responsibilities regarding paying tax.
What tax will I pay?
To see how much tax and National Insurance will be due at differing profit levels for 2019/20 download our sole trader tax and national insurance calculator below.
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