Becoming a sole trader might be the perfect fit if you’re looking for a simple and straightforward way to start a business. As the most common business structure in the UK, sole traders enjoy a high degree of flexibility and control, making it a popular choice for startups, freelancers, and small businesses.

In this guide, we’ll break down everything you need to know about sole traders, from their unique advantages and potential drawbacks to the legal and tax obligations involved. By the end, you’ll be equipped to decide if this is the right path for your business aspirations.

Why Start as a Sole Trader?

There are many reasons why people set up as sole traders, including:

• Redundancy – People who are made redundant can take the first step in their business venture, perhaps using redundancy money to help set it up
• You see a gap in the market, using a skill they might have.
• You are fed up with working for a company and want to go it alone.
• It can fit around the family circumstances
• You want complete control of the business.

As the sole owner, you get to decide what products or services to offer, how to price them, and how to run your operation. This can be an excellent option for passionate people about their work and who want the freedom to call the shots.

However, being a sole trader also comes with some risks. Because sole traders are not a separate legal entity from their business, they are personally liable for any debts or losses incurred by the business.

Sole Trader Definition

A sole trader is someone who is self-employed and runs their own business. The sole trader structure is the simplest and most common, and sole traders can be found in many industries.

A sole trader is legally personally responsible for all business finances, also known as unlimited liability. There is no legal distinction between the business and the person.

You are personally responsible for any debts that the business incurs.

Am I classed as a Sole trader?

You may work for yourself but only have one client; in these circumstances, HMRC might decide that you should be an employee. If you are not sure of your employment status as a sole trader, you can check on the HMRC website.

Sole traders typically make all the business decisions, work for more than one client, decide when and where to work and sell goods or services to make a profit.

How to register as a sole trader

You will need to register as a sole trader with HMRC. HMRC will issue a UTR (unique tax reference number), and you will complete a self-assessment tax return each year.

HMRC allows you to register as a sole trader before the 5th of October in your second year of trading. Registering as soon as you commence as a sole trader is best. HMRC may issue you a fine if you register late.

How to Complete Accounts

Keeping accurate and organised accounting records is essential for any sole trader. It is essential to record all business expenses, however small they might seem. Here are some effective ways to manage your bookkeeping:

Accounting Software

There are lots of accounting software options available, ranging from free basic versions to paid subscriptions with advanced features. One of the most popular accounting software for sole traders is QuickBooks.

We recommend QuickBooks for its user-friendly interface. It automates invoicing and expense tracking tasks to save time and improve accuracy. They offer a sole trader plan that can track mileage and calculate taxes.

Bookkeeping Templates

We offer over 25 free bookkeeping templates. The most popular one is the cash book, which allows you to record a year’s income and expenses. It is easy to set up and use, with full instructions available.

How long do I Need to Keep Accounting Records?

In the UK, sole traders must keep their accounting records for at least 6 years from the end of the last company financial year they relate to. This means that if your accounting period ends on the 5th of April, 2024, you’ll need to keep your records until at least the 5th of April, 2030.

Can I complete the accounts myself?

It is possible to set up and maintain accounting records yourself. However, if you are unsure what you are doing, always seek professional help from a bookkeeper or accountant.

Although you will have to pay their fees, in the long term, you may save money as they know the expenses you can claim back and also save time. Some bookkeepers will assist you in setting up the accounts and train you. Support may also be available for any queries.

Sole Trader Taxes Explained

Sole Traders pay income tax and national insurance contributions (NICs) on the taxable business profits. NICs contribute towards your eligibility for certain state benefits, including the State Pension, and are calculated based on your profits.

There are two types of NICs you’ll likely need to pay as a sole trader:

Class 4 NICs: A percentage of your profits above a certain threshold. For the 2023/24 tax year, you pay 9% on profits between £12,570 and £50,270, and 2% on profits above £50,270.

Class 2 NICs: A fixed weekly amount, regardless of your profit level. As of the 2023/24 tax year, it’s £3.45 per week. You pay this if your profits are above the Small Profits Threshold, currently £6,725 per year.

Income Tax

Your Income Tax is calculated based on your total taxable income, which includes your business profits and any other income you may have (such as from employment or investments), minus any allowable expenses and reliefs.

Several self-assessment tax calculators are available; I use Employed and Self Employed. It will calculate annual, monthly, weekly and daily tax and take-home pay.

When Do I Pay Income Tax?

For sole traders in the UK, the tax bill, including both Income Tax and National Insurance contributions, is typically due on the 31st of January, following the end of the tax year. For example, the tax bill for the 2023/24 tax year (which ended on the 5th of April, 2024) is due on the 31st of January, 2025.  

However, “payments on account” might also be required. These are advance payments towards your next tax bill, usually due on the 31st of January and the 31st of July during the current tax year.  

What is a Sole Trader? – VAT Registration

Sole traders do not need to register for VAT unless they exceed the VAT threshold £90,000. Certain circumstances make it better to register for VAT, including purchasing high stock value. There are a few disadvantages to registering for VAT, including:

• Your pricing may have to be increased to cover the VAT
• Accounts will need to be completed quarterly to submit a VAT return
• VAT returns need to be submitted electronically through accounting software due to the rules of Making Tax Digital

The difference between a sole trader and a self-employed

A sole trader works on their own and is registered as self-employed. Someone self-employed can be in a partnership with one or more people. As a partnership, you would share the profits of the business.

If you are a director of a limited company, you will also be an employee of that company.

Examples of a sole trader

Here are a few examples of sole traders:

• Bookkeepers who offer to assist or complete your accounting records
• Hairdressers may work from home, hire a station within a salon or mobile
• Plumbers and electricians will visit the customer site and will require the relevant qualifications
• Gardeners and handypeople will offer their services at customers’ homes
• Small shop owners

Advantages of a Sole Trader

There are many advantages of being a sole trader, including:

• Choosing the hours you work
• All the profits are yours
• Easy to set up and get started with the right skills
• There is no need to register as a limited company at Companies House

Disadvantages of a Sole Trader

There are also disadvantages of being a sole trader, including

• No regular income
• You have to ensure there is regular work
• No cover if you are off sick
• No holiday pay
• You are responsible for any debts the business incurs

Read more about the advantages and disadvantages of being a sole trader.

Sole Trader Frequently Asked Questions

Do I need a Separate Business Bank Account?

Although you do not need a separate business bank account, it is recommended that you keep your personal and business finances separate.

Can I change to a Limited Company Later?

Yes, it is easier to change from self-employment to a limited company than vice versa. Limited companies are limited by liability, so the company owes the debt.

Is a Small Business a Sole Trader?

A small business is not always a sole trader. It can have different legal entities, including sole trader, partnership, limited company, and public limited company.

What is the Legal Entity of a Sole Trader?

A sole trader business has unlimited liability. There is no distinction between the business and the person. You are personally liable for any business debts.

As a Sole Trader, do I Pay my own Taxes?

Sole traders are responsible for paying their own taxes. Taxes include both National Insurance and Income tax.

Can I be Employed and Self-Employed?

Many people work full-time or part-time and run their sole trader business around their job and family commitments. It can be challenging to fit everything in, and you might have to work extended hours to complete the work, but it can be rewarding financially.

Can a Sole Trader Employ Staff?

While sole traders are typically known for running their businesses independently, they do have the flexibility to employ staff if needed to support their operations and growth.

Conclusion to What is a Sole Trader

A sole trader is an individual who owns and runs their own business. They are a self-employed person and are not considered to be employees of the company.

Sole traders have unlimited liability, which means they are responsible for any debts the business incurs. Taxes that sole traders are liable to pay are income tax and National Insurance. Sole traders are required to complete a self-assessment tax return each year.

Although there are some disadvantages to being a sole trader, such as no regular income or holiday pay, there are also several advantages, including choosing your hours and being your boss. If you’re considering starting your own business, becoming a sole trader is worth it.

Return from what is a sole trader to Starting a small business.

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In this blog post, we’ll explore the numerous benefits of filing your tax return early, from quicker tax refunds to enhanced tax planning opportunities. Get ready to embrace the advantages of early tax return submission and revolutionise your financial life!

Short Summary

• Submitting your self-assessment tax return early can provide various benefits, such as faster refunds, improved cash flow management and better access to loans.
• Early submission can significantly reduce the filing process’s stress and allow more time to budget and identify exemptions/reliefs.
• Filing taxes early provides enhanced accuracy and opportunity for corrections before the deadline while avoiding HMRC’s peak season.

The Perks of Early Tax Return Submission

Submitting your return early can unlock benefits beyond avoiding penalties for late filing. Early submission of your self-assessment tax return can lead to faster tax refunds, reduced stress, improved cash flow management, and even better access to loans and mortgages. Don’t wait until the last minute to file your tax return; instead, seize the opportunity to improve your financial situation by submitting your self-assessment tax return early.

Filing your self-assessment tax return early helps you avoid late filing penalties and ensures that you receive any overpaid tax refund promptly. Additionally, early submission allows for more effective self-assessment tax bill management and increases tax planning opportunities.

In the following sections, we’ll delve into the numerous advantages of early return submission.

Quicker Tax Refunds

One of the primary benefits of filing early is the potential for quicker tax refunds. By filing your assessment tax return early, your return is processed sooner, which means you’ll receive any overpaid tax refund faster than if you waited until the deadline. This improved cash flow can help you manage your tax owed more effectively and alleviate financial stress.

For self-employed individuals, a faster tax refund can be especially beneficial. A P60, which outlines your earnings and tax paid for a given tax year, may not always be available or sufficient to prove your income. By filing your tax return earlier, you can provide evidence of your income more quickly, helping you easily secure loans, mortgages, or other financial products.

Reduced Stress

Another notable advantage of filing early is the reduced stress and anxiety associated with last-minute filing. Completing your self-assessment tax return well before the deadline, you can avoid the panic and pressure often accompanying the rush to file. Incorporating assessment early into your financial planning can help you better manage your tax obligations.

Moreover, early submission allows you to tackle any unexpected issues or complications that may arise during the filing process without the added stress of an impending deadline. This means you can take the time to ensure the accuracy of your return and avoid potential penalties for errors or omissions.

Improved Cash Flow Management

Filing your tax return early ensures you receive your tax refund sooner and contributes to better cash flow management. By having a comprehensive view of your financial situation, you can make more informed decisions about your cash flow and allocate funds accordingly.

In the next subsections, we’ll discuss how early tax return filing provides more time to budget and helps avoid late payment penalties.

More Time to Budget

Effective budgeting requires careful planning and diligent tracking of income and expenses. By filing your tax return early, you gain additional time to plan for your self-assessment tax bill and adjust your finances. This extra time allows you to make any necessary adjustments to your budget and ensure you have the funds available to cover your tax bill.

Furthermore, filing early enables you to identify potential discrepancies or errors in your return, providing ample time to correct them before the deadline. This proactive approach to budgeting can help you avoid unexpected financial setbacks and maintain better control over your finances.

Avoid Late Payment Penalties

Late payment penalties and fines can be an unwelcome surprise for those who miss the deadline for filing their tax return. Filing early can avoid these penalties and ensure you have the funds to cover your tax bill.

Additionally, early filing allows you to set up a budget payment plan or make arrangements with HMRC if you cannot pay your tax bill in full by the deadline. This proactive approach can help you avoid late payment penalties and keep your finances on track.

Enhanced Tax Planning Opportunities

Filing your tax return early offers many tax planning opportunities, allowing you to take full advantage of exemptions, reliefs, and tax-saving strategies. By submitting your tax return ahead of schedule, you can identify potential savings and adjust your finances for the upcoming tax year.

In the following subsections, we’ll discuss the benefits of identifying exemptions and reliefs and implementing tax-saving strategies.

Identifying Exemptions and Reliefs

Tax exemptions and reliefs are government policies designed to reduce tax payments for eligible taxpayers. By filing your tax return early, you have ample time to identify any exemptions and reliefs for which you may be eligible, potentially reducing your tax bill.

Some common exemptions and reliefs include deductions, credits, exclusions, and tax-free allowances. By taking the time to research and understand these policies, you can maximise your tax savings and minimise your tax liability, putting more money in your pocket.

Implementing Tax-Saving Strategies

In addition to identifying exemptions and reliefs, early tax return filing provides the opportunity to implement tax-saving strategies for the upcoming tax year. These strategies may include maximising deductions, contributing to a pension, utilising tax-efficient funds, considering charitable donations, investing in an ISA and taking advantage of tax-free allowances.

By planning and implementing these strategies, you can optimise your tax savings and ensure you’re making the most of your hard-earned money.

Minimising Errors and Mistakes

Submitting your tax return early can help minimise errors and mistakes that could result in penalties or additional scrutiny from HMRC. The early filing allows for increased accuracy and ample time for corrections before the deadline.

In the following subsections, we’ll discuss the benefits of increased accuracy and having time for corrections.

Increased Accuracy

Filing your self-assessment tax return early increases the accuracy of your return, reducing the risk of penalties or fines. By taking the time to carefully review your tax return and ensure all information is accurate, you can avoid potential fines and scrutiny from HMRC.

In addition, early filing affords you the time to gather any necessary documentation and consult with a tax advisor if needed. This proactive approach can help ensure your tax return is accurate and complete, minimising the risk of errors and mistakes.

Time for Corrections

One of the key benefits of early filing is the time it provides for making corrections before the deadline. If you discover an error or omission in your tax return, early filing allows you to make the necessary corrections without the pressure of an impending deadline.

By taking advantage of the extra time provided by early filing, you can ensure that your tax return is accurate and complete, reducing the risk of errors and mistakes.

Better Access to Loans and Mortgages

Early self-assessment tax return filing can lead to better access to loans and mortgages by providing proof of income more quickly and efficiently. This can be especially beneficial for self-employed individuals who may not have a traditional salary or wage as proof of income.

In the following subsections, we’ll discuss the benefits of early filing for self-employed individuals and how it can expedite the loan or mortgage application process.

Proof of Income for Self-Employed

For self-employed individuals, proving income can be challenging when applying for loans, mortgages, tax credits or other financial products. By filing your self-assessment tax return early, you can provide proof of income faster and more efficiently than waiting until the deadline. Some financial products may require an accountant to verify the figures.

In addition to tax returns, self-employed individuals can provide bank statements, profit and loss statements, and an accountant’s letter as proof of income. Having this documentation readily available lets you improve your chances of securing the financing you need.

Faster Application Process

Filing your tax return early can expedite the loan or mortgage application process for self-employed individuals by providing the necessary proof of income. This can enable lenders to make an informed decision about your loan or mortgage application, potentially improving your chances of obtaining the financing you need.

Additionally, completing your tax return early can help streamline the application process by ensuring that all required documentation is available and up to date. This can save time and reduce the likelihood of delays in obtaining financing.

Avoiding HMRC’s Peak Season

Filing your tax return early can help avoid HMRC’s peak season, typically around the self-assessment deadline. During this busy period, response times from HMRC can be slower, and dealing with HMRC can be a more stressful experience.

In the following subsections, we’ll discuss the benefits of faster response times and a less stressful experience when dealing with HMRC.

Faster Response Times

By filing your self-assessment return early, you can benefit from faster response times from HMRC, reducing the time you spend waiting for answers to your queries. This can make the tax filing process much more efficient and less frustrating.

To further expedite response times, try contacting HMRC during less busy periods, such as early morning or early lunchtime. Being proactive and avoiding peak periods can ensure a smoother and less stressful experience when dealing with HMRC.

In 2023 HMRC closed the self-assessment phone line for three months; if you have an issue with your self-assessment tax, you might not be able to file it as early as you want.

Less Stressful Experience

Filing your self-assessment tax returns early can lead to a less stressful experience when dealing with HMRC. By avoiding HMRC’s peak season, you can benefit from quicker response times and potentially more accommodating staff, making the overall process less arduous and more manageable.

Early filing allows you to tackle any unexpected issues or complications that may arise during the filing process without the added stress of an impending deadline. This means you can take the time to ensure the accuracy of your return and avoid potential penalties for errors or omissions.

Summary

In conclusion, submitting your self-assessment tax return early offers numerous benefits, including quicker tax refunds, reduced stress, improved cash flow management, enhanced tax planning opportunities, minimised errors and mistakes, better access to loans and mortgages, and avoiding HMRC’s peak season. By taking advantage of these benefits, you can improve your financial situation and enjoy a more efficient and stress-free tax filing experience. Don’t wait until the last minute; start reaping the rewards of early tax return submission now!

Frequently Asked Questions

Can I submit my tax return early?

You can submit your self-assessment tax return early; payment on account is due on 31 January and the next on 31 July. By completing an early return at the start of the tax year in April, you’ll better understand how much you owe for the year and can plan for future payments.

If you’ve overpaid, you should receive your refund sooner.

When can I file my 2023 self-assessment tax return UK?

You can file your 2023 tax return UK on 6th April 2023 once the tax year has ended.

Payment, registration and submission deadlines fall on 31st July, 5th October, 31st October and 31st January.

Is it better to file a tax return early or late?

It is better to file self-assessment tax returns as early as possible in the new tax year since this will allow you to save up for your tax bill.

By filing early, you can take advantage of deductions and credits that may not be available later in the year. You can also avoid the rush of last-minute filers and potential errors when filing quickly. Additionally, additional information is provided below.

How long does it take for HMRC tax refund to go into the bank?

It typically takes HMRC from 2 to 12 weeks to process your tax refund, followed by several days to 3-4 weeks before it enters your bank account.

This means you should expect to wait at least 12 weeks before receiving your refund. However, it could take longer, depending on the processing time.

How can early tax return filing improve my chances of obtaining a loan or mortgage?

Filing your self-assessment tax return early can improve your chances of obtaining a loan or mortgage by providing proof of income more quickly, especially if you are self-employed.

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Making tax digital for business will start affecting the smaller businesses which are not registered for VAT. It is expected to commence in April 2019. It is still unclear from HMRC if it will include all small businesses or if very small ones will be excluded.

Small companies will have to submit their accounts online to HMRC quarterly, which is in line if you are VAT registered. It is unclear at the moment how this will be done and which accounts software will provide the feature. I would expect that most of the main accounting package providers will be able to submit directly to HMRC, but will need to amend their software.

The government has to still write the legislation and until this is done there are no clear guidelines.

Making Tax Digital for Business – Why do we need it?

One of the main reasons for converting to digital tax is to reduce the amount of errors that are made. HMRC reports that over £8 million is lost in avoidable tax errors.

At the moment small business owners find it difficult to know how much tax and NI they owe until they complete their self-assessment tax return. With the pressure of running a business, they are sometimes not submitted until the deadline. This can then leave the business owner needing to pay the whole figure immediately. Digital tax will mean that you can calculate the figure owed over the course of the year.

Digital Tax should I get ready?

If you are a small business, it may be worth starting to use a full accounting software package like Xero, QuickBooks or Sage. This will allow you to get up to speed with the process of doing your own accounts.

If you have not got the knowledge or time to complete your own accounts then now could be the time to get a bookkeeper or accountant in to help. Bookkeepers can get very busy and may not have time to take on new clients when the digital tax is implemented.

Make sure if you do take on a bookkeeper that they are qualified and have the correct insurance in place. They also need to be covered under anti-money laundry.

Further information can be found on the HMRC website.

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