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What is sole trader

When starting a new business means there are lots of exciting decisions to be made. Finding new customers, naming your business, and ensuring you're in the tax man's good books. A part of this will be how you structure your business. The difference between a sole trader business and a limited company is a good consideration to make.

Read our sole trader vs limited company guide for more information.

What is a Sole Trader?

A sole trader is a self-employed person who runs and owns their own business by themselves. If you're a sole trader, you have no legal identity separated from your business. Due to this, many people describe sole traders as a business themselves.

In another article, we look in detail at sole trader advantages and disadvantages.

How does a Sole trader differ to a limited company?

Overall, the main difference between a sole trader and a limited company is that a sole trader is owned and controller by one individual. This means the person has unlimited liability for the business no matter the circumstance. On the other hand, a limited company has split ownership into equal shares between how many people are involved. This can help alleviate some strain and financial stress and leave you with less of a personal return at the end of each year.

Sole Traders, Tax and National insurance:

When it comes to tax and sole traders, things are done differently from a limited company.

National Insurance is great for a few different reasons. It helps build up your state pension entitlement and helps to pay for welfare services such as the NHS. If you're a self-employed sole trader, your national insurance costs are based around how much profit your business makes.

When it comes to tax, there are many rules and processes that go into being a self-employed, sole trader. A sole trader must pay tax on all of their business profits. All taxable business profits are also subject to class 2 and 4 income tax payments.

If you're a sole trader, you can withdraw cash from your business without receiving any tax effect. Tax relief on interest and charges can be claimed if you're a sole trader who has a separate personal banking account from their business account.

Another few points on tax as a sole trader are that when a sole trader sells their business or any assets, the monetary gain they receive will be taxed. Tax relief is given to sole traders on expenses exclusively for their business, meaning they won't need to pay tax, or any tax they do pay will be reimbursed.

What is a sole trader?

Can Sole Traders employ staff?

If you're a sole trader, it doesn't mean that you have to work your business as an individual. Employees can be hired, so there is no need to set up a limited company if you're looking for workers in your business.

The term 'Sole Trader' means that you are completing your business, trading as yourself under your own name.

How to come up with your sole trader business name:

When it comes to setting up your business name as a sole trader, there are a few rules you need to follow.

Sole trader names must not:

  • Incorporate ‘limited’, ‘Ltd’, ‘limited liability partnership’, ‘LLP’, ‘public limited company’ or ‘plc’ within the company name.
  • They must not be found offensive, such as using discriminating or offensive language.
  • They must also not be the same as an existing trademark.

The name that you choose for your business must also not contain any 'sensitive' word expressions. They must also not suggest a connection with local authorities or the government unless you have received permission.

How do I register as a sole trader?

If you want to register as a sole trader, you will need to complete a registration form via HMRC. This is, so they are aware of your new business and expect a tax return from your earnings each year.

Sign up for self-assessment Tax Return

A self-assessment tax return is used to inform HMRC of a business partner or a sole trader's annual income regarding tax and national insurance liabilities. This form needs to be filled out and completed online, then submitted to HMRC before January 31st each year. To do this, you must fill out an SA100 form that takes into account other incomes such as from property, as well as the money that has been earned through working hard.

Why do I need to fill in a self-assessment tax return?

Being sole traders means that you are responsible for informing HMRC of your annual income every tax year. While standard employees get their national insurance and tax calculated for them, self-employed workers must complete a self-assessment every tax year so that HMRC can be informed and collect this owed money.

If you have earned less than £1,000, you may be exempt from this form, but it is worth checking out.

How to fill in your self-assessment

Here is a step-by-step guide in how to fill out your self-assessment tax return for and how to file it before the deadline of the tax year ends:

  1. Collect your information. Locate all of the relevant information regarding your income. This includes any details of earnings and business expenditures. If you have a separate job - income from employment must be given as well as capital gains, rent, pension, and any redundancies.
  2. Fill in the form. When filling out the form, focus on the sections that are relevant to your own personal circumstance. If you're filling your form out online with your personal details, HMRC will remove any sections that are irrelevant to you.
  3. Report your earnings. Alongside all of your collected information, you must submit your yearly earnings. This needs to include other taxable incomes such as investments or any properties you may own.
  4. Include tax-deductible expenses. Allowable expenses such as travelling, insurance, or marketing need to be added as these costs could be tax-deductible.

Do I need to register for VAT as a sole trader?

The answer to this question is in short, maybe. If you earn over £85,000 each year in your annual turnover, you need to register for VAT.

If your business sells to other VAT-registered business then you can volunteer to register. This can be a great way to reclaim any VAT that has been added within a sale. This is only if it suits your business and will not be suitable for everyone.

Frequently Asked Questions

These two ways of working and running yourself as a business have similar traits but are different overall.

Sole traders describe their business structure. Sole traders are basically self-employed people who are the sole owner of their business. Unlike limited companies, solo traders don't have to register with companies house or have a director of the company.

A good example is if you're a freelance copywriter, that means you're self-employed but can be registered as a business. This applies to many different businesses, from running online shops, freelancing, or working as a self-employed electrician.

If you're self-employed, you're responsible for your own success and failures. This can be regarding your business, the style of work you do, when you do it, and how you do it. You will not receive sick or holiday being self-employed and you pay tax through self-assessment rather than using the PAYE system.

Working this way means you can work for more than one client. Invoices are usually submitted to your client as a means to receive payment.

The kind of business solo traders are, means they are owned and managed by one individual. There is no legal distinction between the owner and the company, meaning that all debts and after-tax profits are personally yours. This style of outgoings and income is known as 'unlimited liability'.

Solo-traders are responsible for nearly everything in their business. Losses that your business make are completely down to the owner, but this also means that any profit does not need to be shared with any other person.

Self-employment in this way also means that you're responsible for any bills that your company may concur. Records of your annual profits, your sales, and your spending all need to be documented. If this isn't done properly, you may find that your small business could be in trouble.

These forms need to be completed every year to contribute and calculate your income tax, insurance, and other monies that you may owe.

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