Making Sense of Sole Trader Tax

Making Sense of Sole Trader Tax

When you start working for yourself, one of your first decisions will be choosing a legal structure for your business. The most common structures for UK businesses are sole trader, business partnership and limited company, each of which is assessed differently for tax purposes. In this brief guide, we take a look at becoming a sole trader and your responsibilities to keep accurate sole trader accounts and pay sole trader tax.

Find out how Futurelink Group can help sole traders.

What is a sole trader?

A sole trader is any self-employed person who has sole responsibility for their business and who is entitled to keep any profits made by the business, after tax. We tend to think of a sole trader as an independent professional or tradesperson, but the term might equally apply to someone who works as a contractor for a company, either directly or through an agency, or someone who works for one or more clients on a freelance basis, amongst other scenarios.

Is becoming a sole trader the right choice for me?

Making the right choice of structure for your business depends on your circumstances. Limited companies offer some financial and legal protection, but these advantages come with additional regulation and they are not necessary for everyone. If your business is not exposed to any financial risk, which will be the case for many contractors and freelancers, then becoming a sole trader is probably the easiest option. Sole trader tax is simpler to manage and the rules governing sole trader accounts are less onerous than those for companies. If you’re unsure which business structure is best for you, it is advisable to seek professional advice.

Sole trader tax responsibilities

You must first register as a self-employed person. This can be done quickly and easily via the HRMC website. If you don’t already have an online Self Assessment account and Unique Taxpayer Reference (UTR), these will be set up for you.

You are not required to file your annual sole trader accounts for inspection as companies are, but you will need them in order to complete your annual Self Assessment tax return to declare your business’ earnings and calculate your sole trader tax. Remember too that HMRC can ask to see sole trader accounts up to six years after the last tax year, so it’s advisable to get into the habit of keeping full and accurate records from the beginning.

Sole trader tax works in exactly the same way as personal tax, since the business and the individual are one and the same. You will also be required to pay Class 2 National Insurance Contributions (NICs). Class 4 NICs become payable when your profits reach a certain threshold, and you may also be required to pay VAT when your business turnover reaches a higher level. Current rates are available to view on HMRC website.

If you’re operating as a sole trader or thinking about registering self-employed, we can assist you in managing your sole trader accounts and offer contractor tax advice. Call us on +44 (0) 1923 277 900 or sign up via our website.

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