Sole Trader Or Self-Employed: What It Means

Thinking of going solo? It’s worth getting the basics straight before you hand over the business cards. Being self-employed simply means you work for yourself rather than for an employer; a sole trader is one type of self-employed person who also owns the business outright. Tell HMRC within three months of starting up so you’re set up for Self Assessment. Note that company directors usually aren’t classed as self-employed — many draw a salary and operate as employees of their own company. The appeal of trading as a sole trader is obvious: it’s quick to set up, there’s no Companies House filing, and day-to-day record-keeping can be simple. But simplicity comes with risk. As a sole trader there’s no legal separation between you and the business, so personal possessions can be at risk if things go wrong. Tax can also nudge you towards a limited company. Once your income passes £100,000 your personal allowance begins to fall, disappearing completely above £125,140 (figures apply to 2024/25). By contrast, limited companies pay corporation tax (noted here at 25%). Some tax analysts say the switch to a limited company becomes attractive at far lower profits — around £30,000, according to CheapAccounting.co.uk. Practical financials to know: Class 2 National Insurance is optional but still available at £3.45 a week. Class 4 NICs are payable on profits — in 2024/25 that’s 6% on profits between £12,570 and £50,270 and 2% on anything above that. Your business profits are added to any other taxable income and taxed at the usual income tax bands. If your turnover reaches the VAT threshold of £90,000 you must register for VAT. The same turnover figure is used in this source to flag mandatory use of HMRC’s Making Tax Digital system, which means using MTD-compliant software. You don’t have to hire an accountant, but many sole traders find one useful — for dealing with HMRC queries or proving income for mortgages and pensions. As a tax consultant from Kreston Reeves notes, a professional brings day-to-day expertise and confidence in your figures. There are plenty of tools to help: Sage, Xero and Tide offer sole-trader plans with features such as receipt capture, invoicing and MTD-ready reporting. And you won’t be alone. The UK has millions of small businesses — the vast majority without employees — so going it alone is a common route. Just weigh the simplicity against the personal risk and tax tipping points before you commit. --- Managing your business finances? TaxAce provides smart online accountancy services for UK businesses with flexible monthly plans. Image and reporting: https://smallbusiness.co.uk | Read original article