Advice and Tips // 25 June 2019
Becoming a sole trader is a popular option for those who are either self-employed or starting their own business. This guide will take you through the important steps from registering as a sole trader, the advantages of a sole trader and what tax you can expect to pay.
A sole trader is essentially the exclusive owner of the business, they manage the business’ profits, but they’re also responsible for any losses their business makes. Some common business that operate as sole traders could be hairdressers, plumbers and electricians.
In the UK you should register as a sole trader as soon as you start trading, if you’ll be earning over £1,000 within a tax year. Unlike a limited company, you won’t need to register with Companies House – all you’ll need to do is tell the HMRC that you are self-employed. You’ll then need to register for a Self Assessment tax return – it’s that simple.
After you’ve registered and filled out a Self Assessment tax return, the HMRC will let you know how much you owe.
If you want to start your own business, setting up as a sole trader is usually the simplest way to do so, with benefits including:
A sole trader fully controls their business and won’t have any shareholders or partners to answer to. They’ll be able to make business decisions independently and be their own boss.
If you’re thinking of setting up your own business or becoming self-employed, registering as a sole trader is the quickest and simplest way to get started, compared with other business structures like limited companies.
Being a sole trader means you have fewer statutory obligations, so you don’t need to publish any of your accounts in the public domain – only you’ll have access to your business’ performance data.
As a sole trader, you’ll be able to claim allowable expenses, also known as business expenses. These are deducted before tax, meaning you’ll end up paying less tax on your profits.
If you’re setting up your own business, you can choose to operate as a sole trader, or limited company. The main difference between a sole trader and limited company is that a limited company has its own identity, separate from the owner. A sole trader is personally liable for any business debts and won’t be protected.
One of the biggest drawbacks to operating as a sole trader is liability. Because a sole trader is not a separate entity, you’ll be personally responsible and liable for the company.
This essentially means any business debts could become your personal debts, so you’re risking personal assets, plus business assets. However, you can take out liability insurance to protect yourself. Another way to minimise liability risk is using business contracts.
Becoming a sole trader means you’ll have lots of responsibilities, and it’s important you do the following:
A sole trader is taxed differently to other companies – via a self-assessment each year – with income tax and national insurance tax on their business profits (after deductions for expenses).
This is different to limited companies, for example, who are taxed on earnings, dividends and corporation tax.
As a sole trader, you don’t have to pay tax on expenses, and these can be deducted from your profits before tax – which means you’ll pay less in tax. The following are allowable business expenses:
It’s important you keep a record of all business expenses as proof of cost to your business, so you have a record to show to HMRC. You’ll need to add up all your allowable expenses and include the total in your self-assessment tax return.
If you’re registering as a sole trader, you may need to need a car or a van for business purposes. Due to large up-front costs, it’s not unusual to new and small business to rely on vehicle finance, as this helps spread the cost over time.
And don’t worry if you have bad credit. Although this may make it harder for you to be accepted for finance, we recognise a vehicle may be essential to your business and accept applications for car finance if you’re self-employed with bad credit.
Before you finance a vehicle you’ll need to choose a vehicle which is right for your business needs and there are a few things to consider:
You should consider the type of journey’s you’ll be making and if they’re most short or long distances. If the latter, fuel economy will play a vital part in your decision and could save you and your business a substantial amount of money – so make sure you check out the mpg.
Your vehicle will represent your business and brand so it’s important your vehicle promotes a good image which is in line with your business. Thinking about the colour of your vehicle may not seem important but colour can often give off a strong impression. For example, white cars can now look desirable but are much harder to clean and could end up looking dirty if not looked after. The colour red gives the impression of confidence and excitement whereas green could help reflect nature and trustworthiness.
Size is perhaps one of the key aspects when choosing a business vehicle. If your using it to just travel from A to B a car is likely to be a suitable option but if you need to also transport large work equipment you may decide a van will give you the space you need. There are many sizes and types of van to choose from:
Each type of van will carry a different weight and capacity so make sure you choose a van which is right for you and your business.
It’s also important to consider the extras you may want in your vehicle if you’re driving long distances which you’re not familiar with a car or van with GPS included would be beneficial.
If you’re a sole trader, you may be able to deduct some business costs from your profits before tax. These costs include office purchases like stationery and phone bills, travel costs including petrol, parking and transport fares and business premises costs e.g. heating and lighting.
Yes, you can be employed at the same time as being a sole trader. Many people start a business whilst still employed, for financial reasons, until the business becomes more profitable and they can afford to go self-employed full time.
Yes, although many sole traders will work alone, you can employ staff as a sole trader – but you must ensure to meet legal requirements, like ensuring they have the right to work in the UK and meeting national minimum wage standards. You’ll also need to tell HMRC by registering as an employer. You can find out more information here.
Your insurance requirements will vary depending on your type of work, so it’s worth looking at insurance options to protect you and your business. If you employ any staff, you are required to have employer’s liability insurance.