Millions of people around the world dream of working for themselves. The prospect of becoming your own boss may well be too tempting to turn down, while becoming self-employed will undoubtedly provide you with a certain sense of freedom and flexibility. After all, everything you do will be for you, and you’ll finally be completely in control of your own income and workload.
In practise, however, running your own business comes with a huge amount of hard work and responsibility, and you should only seriously consider taking the plunge once you understand exactly what that involves. From marketing your services to finding specialist contractor accountants to help manage your finances, becoming self-employed can seem incredibly daunting at times.
That being said, the latest ONS figures show that the number of self-employed workers in the UK has risen to 4.8 million, while government data confirms that around 60% of all UK businesses are operating as sole traders. So, what’s the secret to their success and how can you get started as a sole trader in 2019?
What is a Sole Trader?
Simply put, a sole trader is someone who solely owns their own business but hasn’t registered it with Companies House. As we’ve already mentioned, this is currently the most popular model of self-employment in the UK, and you’ll be relieved to know setting up requires very little paperwork.
Although they’re able to take home 100% of their own profits, sole traders don’t receive the same legal protection as other business types, meaning personal finances could well be at risk.
What’s the Difference Between Sole Trader and Self-Employed?
This an incredibly common question, but there’s actually very little distinction between a self-employed worker and a sole trader. In fact, if you class yourself as self-employed but haven’t set up as a limited company, then it’s incredibly likely that you are, in fact, a sole trader.
“Sole trader” refers to the business model you’ve put in place, whereas “self-employed” describes the way in which you work. In most cases, they are two different words meaning the same thing, which causes a great amount of confusion for those just starting out.
How to Register as a Sole Trader
Fortunately, registering as a sole trader is remarkably simple. Once you’ve decided this is the path you want to take, you just need to let HMRC know about your new business within 3 months of setting up; where you’ll be asked to provide some personal information and a few details about the business itself.
How Much Tax Do You Pay as a Sole Trader?
Once you’ve registered as a sole trader, you’ll automatically be registered for self-assessment. This is the system HMRC uses to collect income tax from self-employed workers, and you’ll need to fill out and submit the form before the deadline to avoid any penalties. If you’re planning on submitting a paper form, the deadline is October 31st, while any online forms must be completed and sent by January 31st.
Either way, sole traders don’t have to worry about registering for VAT until their income exceeds £85,000 a year, while income tax and National Insurance payments are deducted from their total annual profits (minus expenses and personal allowances). Unlike limited companies, a sole trader doesn’t pay Corporation Tax, so you will simply pay tax at the same rate as a normal employee.
As of 2018/19, personal allowance stands at £11,850, and income up to £34,500 will be taxed at 20%; while anything more than that will be 40%. If your income exceeds £150,000, then the rate will increase to 45%.
The Benefits of Becoming a Sole Trader
So, the big question is: why should you become a sole trader? After all, setting up as a limited company provides you with far greater financial security, improved tax efficiency and enhances the professionalism of your business.
But there are clear benefits to setting up as a sole trader, not least of all because it’s the quickest, easiest and most cost-effective way to start working for yourself. Since you won’t need to answer to any directors or shareholders, becoming a sole trader offers the highest levels of control and flexibility you’re ever likely to find, allowing you to completely take charge of your own working life.
Of course, the biggest benefit is the fact you’ll be able to retain all of your business’ profits, while also claiming capital allowances on any equipment needed for you to actually carry out your job. Additionally, since you won’t have registered at Companies House, this means your financial records will be kept secure and private, rather than being entered into the public domain.
Although it’s undoubtedly the most popular form of self-employment, becoming a sole trader certainly isn’t without its risks. You need to evaluate all the factors involved before deciding how you want your own business to operate, while it’s also worth speaking to an accountant about which option is financially best for you. However, even if you do initially start out as a sole trader, you can always make the switch to a limited company if you want to work under a different structure.