Company formations

What Is A Sole Trader?

There are more sole traders in the UK than any other type of business, and constitutes the easiest way to begin trading. When you are a sole trader, you take on all the benefits and the responsibilities of your business’s assets and liabilities.

Business Name

As a sole trader you can trade in your own name, or use a business name. E.g. you can trade as ‘John Smith’ or ‘John Smith trading as ‘Freedom Taxi Services’. You can set up a bank account that accepts payments in your trading name, although if wanted to incorporate your business as a limited company later on, there is no guarantee that ‘Freedom Taxi Services limited’ would be available, unless you pay a company formation agent to reserve the name for you.

Registration With HMRC

When you begin trading as a sole trader you must register with Her Majesty’s Revenue and Customs as ‘self-employed.’ If you fail to do this, you may need to pay a penalty. In terms of tax, you will be required to complete a tax return and be taxed under the self assessment rules. You will pay tax on your taxable profits, at the applicable tax band (either 20% or 40% or a combination of the two, depending on how much profit you make.)

You are taxed on your business income alongside your personal income, so if you have additional sources of income aside from your business (e.g. rent from a rental property) these will be included on the self-assessment for. As a sole trader, you will be liable to pay Class 2 and 4 national insurance contributions (NIC.)

If your business turnover is greater than £68,000, or if you expect your turnover to reach this amount over an annual period, you will also have to register for Value Added Tax (VAT) and collect VAT on all your invoices, as well as submitting quarterly or annual returns to Customs with the appropriate outstanding VAT.

Benefits of Being A Sole Trader

Unlike the administrative burdens that come with being a director of a limited company, sole traders have substantially less paperwork and administrative duties, leaving them more time to get on with what they want to do –making profits!

Drawbacks Of Being A Sole Trader

If something goes wrong with your business, for example you fail to honour payment under a contract, the creditor can come after your personal assets as there is no distinction between them and the liabilities of your business.

If you have a good year when you are a sole trader, there is no way to defer payments of the tax liabilities that you incur

Whether a company or sole trader business structure is right for you will depend on a number of factors. If in doubt speak to your accountant as they will be best placed to advise you as to the tax implications and your particular circumstances.

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