Originally written by Ben Lobel on Small Business
If you are self-employed then this means you work for yourself, and not for an employer. A sole-trader is a self-employed person, but they are the sole owner of their business.
Within three months of becoming self-employed you need to inform HMRC so they can ensure you are paying Class 2 NICs and you fill in a self-assessment form.
Company directors are not self-employed. Many directors are employees of their company and will be paid as employees in the normal way.
Sole trader vs limited company
Although being a sole trader avoids all the hassle of registering with Companies House and presenting annual accounts, one downside is that your personal assets are not distinguishable from your business assets. In short, your creditors could come after your house and possessions if things go wrong.
Read: How to become a sole trader
And if you are earning over £100,000 as a sole trader, you would be advised to set up a limited company; sole traders lose their personal allowance over the £100,000 threshold, so that anybody earning between £100,000 and £125,000 tax will be taxed at 60pc as opposed to the corporation tax rate of 19pc (due to go down to 18pc in 2020).
Registering as a sole trader
Being a sole trader is the simplest way to run a business, and does not involve paying any registration fees, but you must register as self employed.
Keeping records and accounts is straightforward, and you get to keep all the profits.
The difference is that you are personally liable for any debts that your business runs up, which can make this a risky option for businesses that need a lot of investment.
It is easy to start up as a sole trader. You have to specifically register as a sole trader within three months of the month you started up. Separately, you may also want to also register for VAT as a way of making your new company seem more established.
Setting up a business: sole trader vs limited company
A sole trader’s accounts
As a sole trader and a conventional partnership, your accounts must follow accepted accounting practice to give a true and fair picture.
But the exact form of accounts is not laid down by law. In practice, this means you do not have to produce a balance sheet.
It would, however, be advisable to do so to impress your tax inspector or bank manager and to help you to keep a proper check on the financial position of your business.
It is possible to do your own accounts rather than employ an accountant.
If your business is very simple, you could set up your own accounting system using a spreadsheet, but generally it is better to use an off-the-shelf software package.
And if your turnover is over £85,000 you must compulsorily register with HMRC and its Making Tax Digital (MTD) online reporting system, which means using MTD-compliant software.
Employing an accountant as a sole trader
As a sole trader, you do not have to employ an accountant if you do not want to.
However, if the cost is not too exorbitant, you are recommended to do so, as it can help in dealings with the tax inspector.
It may also help you if you need confirmation of income from your business – for example, to get a mortgage to buy a house or make contributions to some personal pensions.
Jo White, tax consultant with Kreston Reeves, says: “It’s the benefit of having somebody who does this day-to-day. Data is only as good as the person you have inputting it. It’s about having that reassurance that you’re presenting to the Revenue is correct.”
Paying tax and national insurance as a sole trader:
As a sole trader you pay two types of national insurance contribution (NIC). If your earnings are above a lower threshold, which is £6,365 for 2019/20, you pay Class 2 contributions at a flat rate of £3 a week in 2019/20.
In addition, you pay Class 4 contributions as a percentage of your profits. In 2015/16, Class 4 NICs are 9 per cent of profits between £8,632 and £50,000 and an additional contribution of 2 per cent of profits above the upper profit limit.
The business of a sole trader does not have a separate identity from the individual concerned.
So your profits are added to any other taxable income you have and subject to income tax if the total comes to more than your personal allowance.
Further reading
What is the definition of a sole trader
Small Business
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Ben Lobel, Khareem Sudlow
