Sole Trader & Partnerships

The simplest way of running your business is as a sole trader. Once you have registered as self employed with HM Revenue & Customs you are free to commence trading immediately.

Operating as a sole trader offers the attraction of minimum bureaucratic interruption from the numerous business compliance issues faced when operating a Limited Company. However, a sole trader is ultimately responsible for any liabilities within the business should anything go wrong. We advise taking professional advice before deciding on the correct trading method, contact our professional advisers for more information.

It is very important that you register as self employed before you commence trading, to register you need to complete a Form https://online.hmrc.gov.uk/registration/options

Failure to register as self employed with HM Revenue & Customs within three months could lead to you incurring a £100 penalty.

Tax & National Insurance

Self employed income is subject to income tax and is reported annually on a Self Assessment Tax Return form, HM Revenue & Customs will send you a tax return form on registering as a self employed person.

Your tax liability is assessed on the profits of the business and is payable on 31st January preceding the end of the tax year; For example tax year ended 5th April 2014 would be payable 31st January 2015.

You will also be required to make a payment on account towards next years tax liability, which is also due on 31st January. This amount is estimated at 50% of your current year tax liability, with another 50% becoming due on 31st July. These estimates can be reduced, however, should your actual tax liability exceed the estimates paid then HMRC will charge interest and penalties on the deficit.

The National Insurance classes for self employed individuals are entitled Class 2 and Class 4.

Self employed individuals are liable for Class 2 NI contributions on a fixed amount calculated on a weekly basis. It is normal to set up a direct debit arrangement with HMRC, either monthly or quarterly. If you are already paying NI contributions in another job then you may be able to defer paying your Class 2 contributions until the end of the tax year. If you require further advice in this area please contact us.

Like income tax Class 4 NI contributions are assessed via your Self Assessment Tax Return on the profits of the business.

VAT Considerations

VAT is separate from Income Tax and National Insurance, even though you have registered as self employed you won’t automatically be registered for VAT, this involves a separate process. The standard rate of VAT is 20%.

Penalties for getting your VAT position wrong can be significant, for more information on whether you will be required to register for VAT please contact us or visit the VAT section of our website.

Banking Considerations

As you are the legal entity when operating as a sole trader it is acceptable to use your current bank account for business transactions. However, we would strongly advise that a separate business bank account is opened in your trading name; this will enable you to keep your business and personal finances separate and easily identifiable.

Insurance Considerations

In today’s increasingly litigious society it is essential that any business insurers itself properly.

How do I become a Sole Trader?

Once you have taken advice and decided that the sole trader structure is the correct way for you to go you should follow the easy checklist below;