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Fact sheet 2 – Getting started as a sole trader

Once you make the leap into self-employment, you’ll need to decide which business structure you want to use – sole trader status or a Limited Company.

Due to the ease of set-up, minimal costs, paperwork and admin involved, the sole trader option tends to come out tops for people just starting out in self-employment. 

1. What is a sole trader?

A sole trader is the exclusive owner of a business who is entitled to retain all the post-tax profits, but is responsible for all its losses. 

Being the sole owner doesn’t mean you must be the only worker in the business. You can recruit staff if you want to.

Unlike operating through a Limited Company – where there’s a separation between your business assets and your personal assets – a sole trader has unlimited liability. There’s no distinction between your business debts and personal debts. So, technically, if your business is in serious debt and it’s unable to pay it, you could lose everything – including your own home.

2. What are the advantages of being a sole trader compared to working through a Limited Company?

While sole traders and Limited Company directors have to file Self Assessment returns to HMRC, sole traders don’t have to file documents such as Corporation Tax returns and Annual Accounts.

Also, the accountancy costs associated with sole traders are lower than those racked up by Limited Company directors.

3. What are your responsibilities as a sole trader?

Registering as a sole trader

You should register yourself as a sole trader as soon as you start to work for yourself. You can do this online via the HMRC website. At the latest, you should register by 5 October in the second tax year that your business has been running. 

Paying tax and National Insurance

As a sole trader, you’re responsible for paying Income Tax through Self Assessment. You’re also liable to pay two forms of National Insurance Contribution (NIC).

Class 2 NICs are a predefined amount charged weekly and Class 4 NICs are charged as a percentage of your profits over a certain amount.

Registering for VAT

You’re legally obliged to register for VAT when your turnover for the previous 12 months exceeds the VAT threshold, but you can register at any time (even if you don’t earn more than this).

Whether or not being VAT registered is the best option for you depends on your circumstances.

Claiming expenses

Like Limited Companies, sole traders can claim back expenses that directly concern their business.

The Government lists all allowable expenses – from office costs to advertising.

4. What is the best business structure for someone getting started in self-employment?

In general, people who are just starting out in self-employment tend to be better suited to becoming sole traders while more seasoned workers favour working through Limited Companies. 

To find out which structure is best for your business, contact us for an informal discussion.