Should I be a sole trader rather than set up a limited company?
For many people, yes. If the main thing that you are risking is your time and effort rather than your life savings, then a more emphatic yes. If you are going to be bringing investors on board, then no, you should probably incorporate a limited company after all. Also if you are signing a long lease on premises or equipment, it may be worth incorporating a limited company too, as long as you are not offering a personal guarantee on the lease.
Book a free zoom call with Clough Accounting here, these are up to 30 minutes long, and we can run through many things that it is important to think about when starting a business, including whether to operate as a limited company or as a sole trader.
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What is a sole trader?
A sole trader is a person with a business who has not set up some other form of organisation such as a ltd company, a partnership or a Community Interest Company. You just have to register with HMRC as a sole trader online by 5th October following the end of the tax year in which you first trade, and they will send you a UTR (Unique Tax Reference) if you don’t have one already. So if you start trading in February 2025, you have traded in the 2024-25 tax year ending 5th April 2025, so must notify HMRC by 5th October 2025. You will need to submit your tax return by 31st January 2026 and pay any tax and national insurance due by then too - it is better to submit your tax return early so that you know how much you will have to pay.
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Can a sole trader have staff?
Yes, the name sole trader does not suggest this, but a sole trader can have any number of staff as long as they register for PAYE and run a payroll before paying salaries.
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Can a sole trader be VAT registered?
Yes a sole trader can be VAT registered, indeed if they reach the 12 month rolling turnover threshold of £90,000 they must register for VAT
What taxes does a sole trader pay (2024/25 tax year)?
Personal Allowance: The first £12,570 of your income is tax-free (if your total income is under £100,000).
Basic Rate: If your taxable income is between £12,571 and £50,270, you will pay 20% tax on the income within that range.
Higher Rate: If your taxable income is between £50,271 and £125,140, you will pay 40% tax on the income within that range.
Additional Rate: For income above £125,140, the rate is 45%.
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Do the self-employed pay national insurance?
Yes – if you earn over £12,570 you will pay class 2 national insurance at £3.45 per week (2024/25 tax year) and class 4 national insurance at 9% on your profits between £12,570 and £50,280, plus 2% on further profits in excess of this.
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What are HMRC payments on account?
The payments on account system is in place if your total tax bill is over £1,000 – effectively you are paying towards your next tax bill. This is two payments due 31st January and 31st July of half of the tax owed for the last year, which can cause cashflow issues especially in the second year of trading.