What is a sole trader? A sole trader definition is a person that sets up business on their own and do not work for another business. In the UK this is one of the most popular small business formations. A sole trader will also be self-employed and will need to register with HMRC. They can also be known as a freelance worker.
There are many reasons that people set up as a sole trader, including:
- Redundancy – People who are made redundant can take the first step in their business venture, perhaps using redundancy money to help set it up
- See a gap in the market, using a skill they might have.
- You are fed up with working for a company and want to go it alone.
- It can fit around the family circumstances
As a sole trader, you are personally liable for any debts that the business occurs. If lots of investment is required to start a business, it is worth looking into a limited company.
How to register as a sole trader
When you start, you will need to register with HMRC as self-employed. HMRC will issue a UTR (unique tax reference number), and you will be issued with a self-assessment tax return each year. HMRC allows you to register any time before the 5th of October in your second year of trading. It is best to register as soon as you commence as a sole trader. You may be issued with a fine from HMRC if you are late registering.
Figures for the financial year will be required to complete a tax return. Keeping all paperwork relating to your business is important. There are several ways in which you can complete your accounts including, free Excel bookkeeping templates, free bookkeeping software, paid for accounting software and paper-based records.
Can I complete the accounts myself?
It is possible to set up and complete your accounts. If you are not sure what you are doing always seek the advice of a bookkeeper or accountant. Although you will have to pay their fees, long term you may save money as they know the expenses you can claim back and also save time. Some bookkeepers will assist you in setting up the accounts and train you. Support may also be available for any queries.
What taxes do I need to pay?
As a sole trader, you will pay two types of taxation. The first is Class 2 National Insurance Contributions. The other tax is class 4; based on percentages of the taxable profit. There are several self-assessment tax calculators available; I use Employed and Self Employed. It will calculate annual, monthly, weekly and daily tax and take home pay.
What is a Sole Trader, VAT registration
As a sole trader, you do not need to register for VAT unless you are over the VAT threshold of £85,000. There are certain circumstances where it is better to register for VAT including purchasing high stock value. There are a few disadvantages for registering for VAT including:
- Your pricing may have to be increased to cover the VAT
- Accounts will need completing quarterly to submit a VAT return
- VAT returns need submitting electronically through accounting software due to rules of making tax digital
Difference between a sole trader and self-employed
A sole trader is someone who works on their own and registered as self-employed. Someone self-employed can be in a partnership with one or more people. As a partnership, you would share the profits of the business.
If you are a director of a limited company, then you will also be an employee of that company.
Examples of a sole trader
Here are a few examples of sole traders:
Bookkeepers who offer to assist or complete your accounting records
Hairdressers may work from home, hire a station within a salon or mobile
Plumbers and electricians will visit the customer site and will require the relevant qualifications
Gardeners and handy people will offer their services at customers homes
Small shop owners
Advantages of a sole trader
There are many advantages of being a sole trader including:
- Choosing the hours you work
- All the profits are yours
- Easy to set up and get started with the right skills
Return from what is a sole trader to Starting a small business.