Being a sole trader is the easiest way to start a business - there are fewer reporting requirements than if you set up as a limited company, for instance (although you do have to register as self employed at the HMRC). And accounting is much easier (and hence bills for accountants are lower).
Sole trader: overview
However, if you’re a sole trader, then YOU are the business:
- Its profits are your income (so you may not able to easily minimise your tax bill).
- Its debts are your debts.
- And its mistakes are your mistakes - you can be sued and made personally liable if something goes wrong.
Tax, NI and VAT for the sole trader.
Here are the rules for you - if you take on employees, you’ll need to pay tax and NI for them, too.
Income tax
You pay income tax on your business’s profits - its income (less any allowable expenses or allowances) are added to your own income on your tax return.
One of the disadvantages of being a sole trader comp is that your business’s income is your income, so it’s harder to reduce your tax bill. Plus you can’t pay yourself in dividends rather than salary as a way to reduce your tax/NI bill, as you can with a limited company.
You’ll need to complete a tax return each year to pay your tax.
National Insurance
You’ll have to pay Class 2 national insurance contributions - these are a flat-rate of £2.40 in 2009/10.
If your profits exceed £5,715, you’ll also have to pay class 4 NICs (in 2009/20). The amount depends on your income. You pay 8 per cent on profits from £5,715 to £43,875 (2009-10 figures) and 1 per cent on profit above £43,875.
VAT
As with any business, if your turnover is expected to exceed £68,000 a year (from 1 May 2009), you’ll have to register for VAT. There are pros and cons to this:
- You have to charge your customers VAT (putting your prices up) …
- … but you can also reclaim VAT on things you buy (reducing your costs).
- All this means extra record keeping (although you could consider the flat rate vat scheme)
- But some people will see VAT-registered companies as more respectable.
Your business name
You’ll need to choose a unique business name. can trade under your own name, or you can set up a business name. There are various rules about choosing a business name. One of the key ones if you’re a sole trader is that you can’t put Ltd at the end.
Also, make sure that no one is using your name. If your initials are B.T. you can’t trade as BT. Similarly, if you’re a plumber whose surname is Smith, you can’t trade as Smith Plumbing is there is already a local firm called that (it won’t matter so much if they are 200 miles away).
If you use a business name, you are required to disclose your name as well and a relevant address (EG where documents can be served) on things like websites and receipts. There is more information on the Companies House website.
Administration for the sole trader: good news
You don’t need to deal with companies house - so no registering or annual returns.
Being a sole trader involves less paperwork, which is the attraction for many people. You’ll still need to keep records of your income and expenditure, however.
You should still keep a separate bank account for your business - it will make filling in your tax return much easier, if nothing else.
Liability for the sole trader: bad news
Think very carefully about the risk you are taking on. You are the business - and if you can’t fulfill a contract, for instance, you can be sued. If you were, you might lose your house.
This is one of the key disadvantages over a limited company.
am i able to begin my business and if it goes well then for a ltd company?
Yes, that’s a common thing to do - talk to an accountant when you want to do it. They’ll advise you how to go about it (and you’ll need an accountant anyway probably to deal with all the extra returns that are required from a limited company).
hi, I’m a sole trader in media and publishing; what sort of legal insurance is on offer and best suited for me?
I should also add it involves work in IP rights… thanks
There is all sorts of professional indemnity insurance out there - best bet is to google it, and fine something that covers the sorts of risks you are likely to have.
Hi, I want to start as a sole trader for freelancing. IS it possible to use my own name and my personal bank details for the contract and get paid into that?? I will be though keeping track of the income .
Regards,
Surya
Surya - you don’t HAVE to have a bank account for your business. However, you’ll need to keep meticulous records (and EG how will you account for the split in any interest that is paid?). Also, you won’t be able to trade under a business name (as it will look a bit odd when you write cheques under your own name). And your description as ‘a sole trader for freelancing’ is a bit worrying - are you aware of IR35?
Hi,
Could you ask a question please:
if a sole trader advertises his company name (e.g) ‘’smiths gardening services on their van and on the internet etc but asks the customer to pay direct to the persons (owner) personal accounts (e.g) danny jones and then refuses to provide invoices etc…
is/are they operating legaly?
R
The refusing to provide invoices bit doesn’t sound very legal …
Are there legal or financial implications if a group of 5 or 6 consultants set up a common website to maximise interest in their services, call themselves and their web-site by a group name, and indicate on the web site that they are available singly, or in groups, to conduct consultancy work in the area described on the website? Could they all operate as sole traders or would they have to form a company? Would the answers to these questions change if they simply set up a website providing information updates in their area via a common blog but made it clear that they were each available for consultancy?
Dennis - sorry for the slow reply. Didn’t see question. There are ways to do this, but you really do need professional advice - talk to an accountant (I know I say this a lot …)
I believe now you cannot trade under your own name if the name is used by a Company. eg If my name was sainsbury, I could not run a small shop called sainsbury store. Is that correct
Frederick: That’s pretty much right. There’s more here: http://www.businesslink.gov.uk/bdotg/action/detail?type=RESOURCES&itemId=1073788944
Hello there. I have a Ltd company setup for convenience or ‘insurance’ really, but is dormant and has been since setup in 2008. I am still employed but have a couple of small contracts I will be doing over the next month or so. I dont think I want to trade under the Ltd company as I dont know what contracts I will have (or want to have). Can I trade as a sole trader for these contracts, and if so, can I use a name similar to that registered with company house eg: colin on behalf of company Ltd.
Thank-you.
@ColinM: You (as you ie as a sole trader) and the limited company are separate businesses. So you’re free to trade as either or both. However, you can’t make out you’re one if you’re actually being the other - they’re are pros and cons to both types of business and people you have a contract with have a right to know the status of the business.
So, no, you can’t say it’s on behalf of the limited company if you’re trading as yourself, I’m afraid.
Hi
I am a sole trader t/a example.co.uk, I have a purchase agreement drawn up. At the bottom of the agreement I have the usual stuff you need to put as a sole trader - myname t/a example.co.uk address etc. The question is can i make the contract between my t/a name and the other party or do i have to make the contract between my real name and the other party? The reason I ask is because you are the legal entity not the t/a name.
Also when you write your t/a details is it legal if you use your initial and surname as opposed to full name?
Thanks in advance.
Noodle: Not sure to be honest. I think you probably have to put your name, rather than the trading name (as it’s you who are making the contract - the trading name is just that - a name).
hi
i,ve recently started up as a sole trader and have just took on some sub contracting work now the company im subing for is asking me for my UTR number to pay my tax but i thought i was supose to pay my own tax please help me as i think there just trying to pay me less
thanks
Kevin - it depends on your contract with them. Unless it’s specific that you’re not an employee, they’re probably obliged to treat you as one and put you through the PAYE system. I’d talk to an accountant.
Hi,
I am soon be setting a company up doing Botox and Dermal Fillers. I will be doing this mobile in peoples homes, also days in salons.
Please can anyone advise if i should be a sole trader or Ltd Company?
Any advice would be greatly appreciated.
Thank you.
SMT: Well, it sort of depends on all the things mentioned above. There’s no simple answer …
i currently work fulltime and am thinking about starting up on my own inbetween shifts and at weekends,and keep the fulltime job too, is this a minefield or pretty easy to keep the legal people happy?
Wayne - it’s fine. You just ned to keep the tax people happy. Read up on tax returns online …