Sole Trader – Eligibility, setting up, running, and filing taxes
Updated: Oct 16, 2020
Why become a sole trader?
Sole traders make up a huge proportion of the UK economy. According to some statistics, there are up to 3.4 million sole traders (about 60% of all businesses). Becoming a sole trader provides a relatively quick, and relatively easy way to start your own business. It also ensures you are the exclusive owner of the business, which also means you will be wearing all of the hats. So, if like a lot of people, this business is your baby, this may be the best place to start. We have set out a guide to help keep this process smooth and simple.
Please keep in mind that there is more risk to owning a sole trader than there is a limited company is one major way: you and the company are one legal entity. This means, that should your company owe any money to anyone, you also owe that money, and should this escalate to court levels, they can demand this money back through selling things like your house.
Below, we have outlined what you need in order to be allowed to be a sole trader, how to set up, and finally how to actually run your business from a financial point of view. Please note, we have assumed in this article that you are a British citizen. If you are not, there may be extra things you need first in order to set up in the UK, even if you have the right to work there for the next few years.
You are eligible to set up a sole trader if;
• You make over 1,000 in the tax year (currently: April 6, 2019 to April 5, 2020)
• You work as a freelancer, or get paid as a contractor instead of payroll
That is it! There are many aspects that come into whether or not you want to be a sole trader, limited company, or partnership, but this is all you need to be allowed to be a sole trader.
• You will need to register for self-assessment
• You must file for Class 2 National Insurance. The current small business profit threshold is £6,365, if you make less than this, you do not need to pay into the class 2 NI. If you make more, you must make weekly payments of £3.
• You must also pay into Class 4 National Insurance. Your first £8,632 is NI free, but once you pass this threshold (provided you make below £50,000), you must pay 9% into the NI system.
Please note: these figures are based on profits and not total earnings.
• You must set up within your first 2 years of business (please note, if you do not fill register for self-assessment by October 5th in your second year, you may be subject to fines)
Running Your Sole Trader
When you have your sole trader registration set up, you can go about running your business. Keep in mind, you are required by law to file your taxes annually no matter how much money you make, or even if you have a loss at the end of the tax year.
The tax year is: April 6 – April 5.
For this reason, you must maintain records for everything you do. Your sales and expenses are the most important. The easiest way to do this, is to create a business bank account that you solely use for business purposes. Most cloud accounting software will allow you to sync your account with the system, allowing for an easier bookkeeping method. You may also want to hire a bookkeeper as well to make sure everything is accurate.
Once you reach £85,000 in turnover, you must register for VAT. Whilst this is not necessary until you are over this threshold, it may be useful if you are selling to other VAT registered companies, and want to re-claim the VAT paid on these goods. (More on this in our next article).
The HMRC has now made tax digital, so this process is getting easier and easier. However, it is important to consult a professional, as filing the wrong VAT returns may result in fines.
If you have employees, you can set them up on payroll no problem as a sole trader, the only requirement is that you pay into the PAYE (pay as you earn) scheme, like most employers in the UK.
Once you have grown a bit, and perhaps when you are incurring more risk, you may want to register your company as a limited company. This is completely okay! Provided no one has taken your name, you simply register, and add “Ltd” to the end of your business name. Obviously, with this increase in size and administration needed, this may be a good time to hire an accountant if you haven’t already.
Here at Cooper Financials, we can help you with your UK Sole Trader needs. Contact us today for your free month!