Should I set up as a Sole Trader? Advantages and Disadvantages
If you’re thinking about starting your own business, you’ll know there are lots of pros and cons that need to be considered. We’ve put together a few sole trader advantages and disadvantages to help you make your decision.
What is a sole trader?
A sole trader is simply a self-employed person who owns and runs their own business. The first step towards becoming a sole trader is as easy as finding something that you love to do. In theory, that’s all there is to it! In reality, there are a few more steps to complete before you can kick things off, including registering as a sole trader and sorting out your tax process.
How to register as a sole trader
This is an easy one. Submit a self-assessment form to HMRC to receive your Unique Taxpayer Reference (UTR), therefore registering you as self-employed. This means you are now obliged to fill out an annual tax return. If this seems daunting, drop us a message to see how we can help you out.
How much tax does a sole trader pay?
Tax rates are similar to being employed, as you are taxed each year on the total profit that your business makes. Any losses could then potentially be used to offset against other income streams.
When it comes to tax, keeping money aside to pay your tax bill is crucial. Working with an accountant is one of the easiest ways to stay on top of things and can ensure that you are aware of your tax liability at the earliest opportunity, meaning you can avoid paying more tax than you need to each year.
You also need to make sure you know your turnover for any twelve-month period – once you hit the limits stated by HMRC, you will need to apply for a VAT registration.
What can I claim for as a sole trader?
While self-employed, you can claim for costs such as office space, travel, or advertising expenses. If you are using something for both business and personal use, for example a mobile phone, you can only claim for the business costs.
Some tax rules are more lenient for sole traders, so for example, you could be able to claim tax relief on the business proportion of your travel costs through your tax return. On the other hand, if you worked through a limited company, providing a company car can be expensive and can also create extra admin relating to P11D benefits.
Sole trader vs limited company
So, what’s the best option between setting up as a sole trader vs a limited company? No two businesses are the same, so it will depend on your own personal circumstances - many choose to begin their self-employment journey as a sole trader before making the decision to set up a limited company.
If you are making big profits, the tax and NI rates you pay as a sole trader are potentially higher than if you were operating through a limited company. So, if you find yourself moving into the higher rate tax bands, you should be talking to your accountant about your options.
However, as a sole trader you’d have more privacy since none of your information is in the public domain – you don’t file accounts to Companies House which people could then look up. You’ll also tend to have lower admin costs and burdens, such as cheaper accountancy fees. Great news for your budget! All business profits go to you, which can be a major advantage of sole trading against limited companies.
Whether you’re ready to set up as a sole trader now or would like some more advice, get in touch with our expert accountants and we can arrange a chat to help you get started.