There are around 2.8 million sole traders in the UK. It is the most popular, and simplest, way of starting up in business.
In this guide, we take a look at the key things you need to know about becoming a sole trader, and whether it is the right business structure for you.
So, what is a sole trader?
- As a sole trader, your business and personal finances are considered the same for tax purposes. With the limited company business structure, your business and personal finances are kept separate.
- Once you have registered with HMRC, you can start trading right away. You should not delay telling the authorities, or you may have to pay a penalty.
- Sole traders are taxed under the self assessment tax rules. You will be required to fill in a tax return each year, which will contain details of all the money you have made.
- As a sole trader, you will pay income tax (PAYE) and National Insurance Contributions on your business profits.
- If you are going to have an annual turnover of £79,000 or more (from 1st April 2013), you must register for Value Added Tax.
- Sole traders are not required to fulfil the administrative and legal paperwork that is required if you run a limited company. You will have less administrative ‘hassle’ as a sole trader.
- If anything goes wrong with your sole trader business, you are personally responsible to settle any financial liabilities incurred, as there is no distinction between your business and personal assets.
- In some industries, such as IT, you may find it hard to trade as a sole trader rather than via a limited company, so make sure you investigate your industry before starting up. You should always ask an accountant first.
- If you set up as a sole trader, you can always incorporate as a limited company at a later date if you need to.
- We recommend you read our dedicated guide on how to register as self employed for the practical steps you need to take when you become a sole trader.
- You can read more about setting up as a sole trader in our dedicated guide here, our sole trader tax guide, and also a useful legal overview of all the main business structures you might consider.
Before starting up
Before deciding if becoming a sole trader is the right choice for you, firstly carry on and read our guides to the different business structures available to you, and chat to an accountant who will be able to explain the tax implications in more detail.
There is no ‘right’ or ‘wrong’ business structure – it all depends on what you do, your financial situation, the industry you are in, and how large your business is likely to become.
Sole Trader Package
Our long-term company formation partner, Duport, offers a Sole Trader Package which will help you get up and running as a sole trader in a matter of hours (including the forms you need to register with HMRC). The package will also protect your company name in case you want to use a limited company at some time in the future.