In the run-up to Christmas, every eCommerce business competes to attract potential customers. The earlier you start planning out your marketing campaign, the better chance you have of drawing more
What does it mean to be a ‘sole trader’? Is there any difference between being a sole trader and being ‘self-employed’?
Self-employment means working for yourself and running your own business, rather than being an employee of a company. For employment law and tax purposes, however, the definition of self-employed is that you are fully responsible for the success or failure of your business and you will pay tax through Self-Assessment rather than PAYE.
As somebody who is self-employed, you can choose from several legal structures for your business – sole trader, business partnership or limited company.
By choosing to be a ‘sole trader’, you become the sole owner of a business, meaning the owner and the business are combined legal and financial entities. Therefore, the term self-employment refers to the way you work rather than your business structure.
What does becoming a sole trader mean?
Being a sole trader avoids the necessity of registering with Companies House and presenting annual accounts and may be the perfect choice for many people. You will often find that professionals and tradespeople, such as your local gardener, hairdresser, business coach or graphic designer, are registered as sole traders.
Sole trader businesses are easy to establish and discontinue. They are subject to relatively few regulations, give the owner freedom to make decisions and typically have relatively low running costs. The owner is responsible for keeping day-to-day financial records. However, they will hand the responsibility for the end-of-year accounts to a professional accountant.
The downsides are that sole trader businesses can be difficult to keep afloat, and owners often work long hours and take few holidays. There is nobody to share responsibility with meaning any business weaknesses you have may be exposed. Conversely there is often nobody to share your successes, concerns or plans with, so the sole trader lifestyle can be pretty lonely. Perhaps the most significant downside is that your personal assets are not distinguishable from your business assets. In short, your creditors could come after your house and possessions if things go wrong.
For those who love or need a flexible work life, being a sole trader means that you decide exactly what work you do. Don’t forget that you won’t receive sick pay or holiday pay for time off if you are a self-employed.
Registering as a sole trader
It is easy to start up as a sole trader. You must register as a sole trader within three months of the month from starting your business.
Keeping records and accounts is invariably straightforward, and you get to keep all the profits. As we said above, the difference is that you are personally liable for any debts that your business runs up. This can make it a risky option for businesses that need a lot of investment.
You may want to register your business for VAT as a way of making your new company seem more established. You may choose to register if you know you are going to earn over the VAT limit.
How should I set up my accounts?
It is possible to do your accounts rather than employ an accountant – but honestly, why would you? Most sole traders outsource their bookkeeping and accounts quickly after starting up purely as they are time-consuming. Accounts and bookkeeping administration will take you away from working on your business.
There are some excellent software packages that can and do help sole traders, which are worth considering. You can use them alone or with your accountant. Most back-office support providers, like AccountAbility-Plus, will be very used to working with the different options. We are always happy to support your choice.
Take at look at these software options:
Or you could use a simple spreadsheet.
Do I have to pay national insurance as a sole trader?
The short answer is yes!
As a sole trader, you pay two types of national insurance contributions (NIC).
Class 2 NIC are a fixed weekly amount based on the number of weeks of self-employment in the tax year. – £3.05 per week for 2021/22 assuming your profits are above the small profits threshold, which is £6,515.
Class 4 NIC is based on the level of your self-employed profits. You are only liable to pay Class 4 NIC if your profits are over a certain level. This level runs from £9,568 up to £50,270 for 2021/22.
If you have self-employed profits above £50,270, you will pay Class 4 NIC on profits above £50,270 at a rate of 2%.
The business of a sole trader does not have a separate identity from the individual concerned. Your profits are added to any other taxable income you have. This income which will be subject to tax if the total comes to more than your personal allowance.
UK sole trader and self-employed statistics
As of July 2021, there are approximately 4.3 million self-employed workers in the United Kingdom. Self-employment in the UK has grown steadily, starting from a low of just 3.2 million in December 2000 to a peak at the start of 2020 of over 5 million. Reference link
Here at AccountAbility-Plus we can provide you with a range of professional outsourced services for your business. We offer a bespoke service we call Solo-Plus for those who are self-employed or looking into self-employment.
Our other services include accounting and bookkeeping, payroll and HR management, sales and marketing. We also offer admin and telephone support and so much more. We work with a wide range of sectors within the UK and abroad and are proud of the positive feedback received from our clients.
To find out how outsourcing could work for you contact the team at AccountAbility-Plus today.