How Does Being a Sole Trader Work?
Updated: Aug 3, 2022
Starting a business can feel incredibly daunting but registering as a sole trader is the easiest way of getting your business going. But that doesn’t mean it doesn’t come with responsibilities!
As a sole trader you would be personally responsible for any losses your business makes but you are also entitled to all of the profit (after tax of course!)
The first task if you decided to set up as a sole trader is to register as self-employed with the HMRC. This is basically telling the tax people that you are taking the responsibility of paying your own tax and NI (National Insurance) contributions.
After registering you will need to complete a self-assessment tax return every year – this is where you tell the HMRC how much you earned over the last year and where that money came from - and pay tax on any income and NI contributions. This is where a lot of people feel confused because there are a lot of business expenses that can impact the amount of tax you have to pay. That’s why lots of sole traders choose to use an accountant for their self-assessment.
Just like a limited company, a sole trader needs to register for VAT if their turnover is going to exceed £85,000 in a tax year.
When it comes to being a sole trader and the tax responsibilities, there is one thing you can do, right from the start, that will make your life easier – keep accurate digital records. A shoe box in the van just won’t cut it I’m afraid – this is 2022!
While you and your business are seen as one entity in the eyes of HMRC, it’s still important to keep your business and personal accounts separate. Accurate and detailed reports ensure your yearly self-assessment is not only done with more ease and less time, but you are also less likely to have any mistakes which means you are less likely to pay too much tax!
Many sole traders choose to do their own bookkeeping – which is just a different way of saying tracking all the comings and goings within your business – of course, I offer this service as part of my monthly package. You can book a call here to discuss your accountancy requirements. If you do decide to do your own, I would still recommend using accounts software to do so. I really like Free Agent but there are lots of options. The benefits of software, over using a spreadsheet, is it can talk to your bank, matching everything up – or reconciling, as us accounts say.
One misconception about being a sole trader is that it has to be just you – understandable where this confusion arises, with ‘sole’ in the name! The fact is, as a sole trader you can employ people and use staff to grow your business. Again, this comes with responsibility. From an accounts perspective all employees need to go through payroll and that needs to be registered with HMRC. And they need to be registered with a pension provider because of the compulsory employer contribution – again, an accountant can help you set this up and process it every month for you to save you a job! Of course, there are other responsibilities when it comes to employing staff. ACAS is always a good resource if this is something you’re considering.
The accounts side of a business is often the area people feel most uncomfortable with. It can feel daunting. Burying your head in the sand won’t make it any easier I’m afraid and leaving your tax return until the last minute can lead to all sorts of problems, and if you get stuck your first choice of accountant might just be fully booked!
I don’t want your accounts to be a source of stress or a time guzzler for you. I also know that many small business owners who are starting out as sole traders aren’t in the position for the investment of the support from an accountant. That doesn’t mean I can’t help. If you’re confused or concerned about any of your responsibilities as a sole trader, get in touch today and I will do what I can to set you up on the right track.