What does it mean to be a sole trader in the UK?

What is a sole trader UK? A sole trader is a self-employed individual who runs his or her own business. Sole trader businesses don’t have a separate legal entity to the owner, which basically means the business is YOU. This article will explain what a sole trader is, how you can get started, the pros and cons and also explains your ongoing tax and legal responsibilities.

You are a sole trader and have complete control of your business, assets, and profit after taxes. This business model is also very simple, flexible, and offers many other benefits. We will be discussing the advantages of sole traders in a separate article.

What is a sole trader UK? Unlike the owner of a limited business, is personally responsible for all debts in their company. Personal assets could be subject to garnishment if they are unable to pay creditors. The pressure of having to take on all responsibility and this unlimited liability can make it difficult. An article has been created that explains the downsides to being a sole proprietor.

What is a sole trader UK? Are you familiar with the characteristics of limited companies?

You should be aware that limited companies can offer advantages when comparing different business structure options.

You can compare the characteristics of a sole trader with other business structures such as a limited partnership, general partnership, limited liability partnership or company limited via guarantee.

What is a sole trader UK? Although the sole trader model is possible for many business types, it’s most common among those who provide services to families and individuals. It’s not uncommon to see sole traders in plumbers, decorators and plasterers as well as hairdressers or other specialists who provide services.

You might find some other business types that operate solely, such as small businesses and manufacturers or self-employed consultants.

A sole trader is a different type of business than many others:

Companies House does not require that you register your business or file ongoing information.

Capital is not available for investment by shareholders. The only person who can fund the business is the sole trader.

You won’t find multiple partners in general partnerships, so the sole-trader model may not be suitable for you if your goal is to start a business alongside someone, sharing both the risk and the rewards.

What is a sole trader UK? A sole trader has many similarities to other forms of business, such as:

HMRC still requires you to pay and report tax. Below we will discuss the registration process as sole trader at HMRC, and what your ongoing responsibilities are.

Although it is true that you are the sole trader, it can still be prudent to have a separate account to handle certain matters, such as your business bank account and personal account.

You must follow some rules if you want to trade under another name than your personal name. Your business name must not be offensive or contain ‘sensitive words’. It cannot also copy the business name of an existing company. On business documents such as invoices and letters, you must add your name, and if necessary, the name for the business.

Employing staff is possible. You can hire staff if you are a sole trader.

Start your business as a sole trader

Register with HM Revenue and Customs online if you are a sole trader and start to work for yourself as a self-employed business.

Although it is not possible for you to register before you begin trading, HMRC must be notified promptly. If you don’t have the reason, register for self-assessment.

What is a sole trader UK? You should also consider the following things when you start your business as a sole trader:

You must obtain permission from the local authority before you start a business. This applies for all types of work, such as driving a taxi.

Establishing a bank accounts – It’s always best to have a separate bank account for your business and personal accounts.

It depends on what type of business you are running, the location that is most suitable for your operation will be important. You may want to decide whether or not your lease agreement allows you to rent a part of your house for your business.

If you are required to complete VAT registration, or if you want to do so voluntarily, register for VAT

Registering a Pay As You Earn payroll program (PAYE), is advisable if you plan to hire people. Also, you will need to take into account employment contracts and statutory pension entitlements.

It is necessary or desirable to have business insurance. We will be looking at the various types of insurance for business that might be useful or necessary in another article.

Register with the Construction Industry Scheme (CIS) if you are a subcontractor or contractor in the construction sector.

All funding options that may be available to the company, such as grants and loans.

Tax obligations

The income earned by your sole trader is included in your income. You will need to file a self-assessment tax return each year, detailing both your income and expenses, regardless of whether you have done it before. HMRC will also require you to make a tax return.

Based on your taxable income, you are subject to an income tax

If your annual income is less than £6,515 you will be subject to Class 2 National Insurance Contributions (NICs).

Class 4 NICs: In 2021/22, they are 9% on profits between £9.569 and £50.270, and 2% for profits over £50.270.

All tax owed must be paid no later than 31 January after the close of the relevant tax year. There may be a need for you to pay twice per year ‘payments in account’. These are advance payments that will cover the current tax year.

You must ensure that you collect and pay HMRC the correct amount of income tax, national insurance and other contributions when you hire people to work for your sole trader company. You will also have to run a Pay As You Earn payroll program.

Register for VAT

Only register for VAT when your annual turnover (that is, your total income over the course of a calendar year) is at least £85,000

However, VAT registration allows you to claim VAT on purchases related to business such as fuel and books. Even if your goal is to reach the mandatory threshold, it’s worth considering registering for VAT.

Register to the Construction Industry Scheme

Are you a contractor or subcontractor in the construction industry?

Register for the Construction Industry Scheme.

Contractors can use this program to deduct funds from payments they make to subcontractors, and then pass it on to HMRC. They will be treated as National Insurance Contribution payments and advance income tax.

What is a sole trader UK? You’re all set. Now you’re ready to go.

It can be overwhelming to start your business. You have a lot of things to do and think about.

Registering as a sole trader can be done quickly and easily.

Let’s take a look at this quick checklist.

– Consider whether you are a sole trader or not.

– You can choose to trade under your business name, or use it as a company name. HMRC rules will govern what business names are acceptable.

– Register as a sole trader before the end of your second year. You could be fined if you miss this deadline

– You must ensure that you keep track of all your records, income taxes, national insurance and VAT obligations

– A partnership is a way to start a company with other sole traders or multiples.

Additional responsibilities for sole traders

What is a sole trader UK? You must keep accurate and complete accounting records as a sole trader. However, accounts do not have to be maintained in one form or another, as is the case with most business entities.

You’ll also need to maintain accurate records about your expenses and sales. They will be of great value when it comes time to file your self-assessment tax return.

As you’re not a limited company, you don’t need to file confirmation statements or make filings to Companies House. You will still have to comply with all requirements for any type of business. These include ensuring that you have adequate insurance and staying on top of your Health and Safety obligations.

If you liked this blog post What is a sole trader UK?, then make sure to check out our last one: Planning for business year end.