Running a business as a Sole trader is the simplest way especially when you run an operation on a small scale. You get to exercise full control with complete flexibility to operate business. However you are also solely responsible for any loss.
Here are all the insider details of being a sole trader, keep reading
What is a sole trader?
When you are the sole owner and self-employed in your business you are the sole trader. A sole trader does not have directors or shareholders like a limited company where other people are also accountable for the liabilities.
You are in full control of running your business and benefit from all the profits. This can be both rewarding and risky.
A sole trader has unlimited liability which means that in case the business becomes insolvent, you will be personally liable to repay the creditors. Sole traders are mostly small business owners providing products or services to families and individuals.
They have no or few employees like plumbers, photographers, makeup artists, interior decorators or hairdressers.
Advantages of being a sole trader
Being a sole trader means you decide the rules and are in full control of your business. This means more freedom and flexibility of quick decision making without needing to hold a meeting for shareholders.
Being a sole trader comes with many advantages:
- Sole traders set up quick and have no to minimum obligations
- They do not have to register their business as a company name. All they need to do is inform the HMRC about operating as a sole trader.
- Sole traders have easy accounting jobs. They do not have to meet any accounting standard to file corporate tax returns or annual balance sheets etc. They just have to maintain a record of invoices and expenses then send the details of profits in annual self assessment tax returns.
- Sole traders get to keep all the profit unlike big corporation where they have to divide the profit among shareholders.
- They can keep all the financial information private.
How to register as a sole trader?
To register as a sole trader follow the below mentioned steps:
- Contact HMRC to inform that you will be paying taxes as a sole trader.
- You can fill HMRC registration form both online and offline via post.
- After completing registration you need to activate HMRC online account using the activation code and 10 digit unique taxpayer reference.
- Complete the annual self assessment tax return online.
How do sole traders pay tax?
Once you have completed the HMRC form and calculated the tax amount you owe using debit card, online banking, credit card or you can visit the bank to pay HMRC.
What expenses can a sole trader claim back?
HMRC often don’t tax you on money you need to spend to run your business. This is why when you are calculating tax, subtract a total of operating expenses from your gross income.
Accounts sole traders are required to keep
Sole traders are not required to submit multiple accounts to HMRC limited companies. However they do need to keep a thorough financial record of expenses and income from your business which will be used for your tax returns including receipts and original invoices.
Do sole traders require to open a dedicated bank account?
A sole trader are not needed to open a dedicated business account legally. HMRC treats the business and personal income as the same and you can use personal account for business purposes.
It is best to keep everything separate so you do not spend business funds for personal shopping and vice versa.
Benefits of hiring an accountant to sole trader
Accounts can prove to be a valuable support to sole traders. You don’t have to submit multiple account like a limited company would. Accountant will help to navigate the self assessment tax every year and also help you keep a track of your expenses and invoice and calculate your tax.
Staying on top of the account and tax is most important as a sole trader because you are liable for your debts personally. Accountant can also help you ave money by making sure your business is tax efficient.
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