Am I a sole trader?

If you run your own business as an individual and consider yourself to be self-employed, this means that you should set up as a sole trader. If you’re self-employed then this means you work for yourself, and not for another employer. A sole-trader is a self-employed person, but they are the sole owner of their business.

If the following applies to you and your business, then you must set up as a sole trader:

- If you earned more than £1,000 from self-employment between 6 April 2019 and 5 April 2020
- If you need to prove you’re self-employed (to claim Tax-Free Childcare, for example)
- If you want to make voluntary Class 2 National Insurance payments to help you qualify for benefits

As a sole trader, you can keep all your business’s profits after you’ve paid the appropriate tax on them. On the other side of the coin, you’re also personally responsible for any losses your business makes.

How do I set up as a sole trader?

In order to set up as a sole trader, you need to tell HMRC so that you are able to pay tax through your Self Assessment tax return. You’ll need to file a tax return every year and keep a close eye on your finances – but our accounts team can help you with this side of your business.

You can take the steps to set up as a sole trader either through the Government portal or with the hands-on, supportive help of our sole trader accounts team.

What responsibilities do I have as a sole trader?

Whilst being a sole trader and being your own boss is an exciting way to do business, there are some important responsibilities to take care of each month.

These responsibilities include:

- Keeping records of your business’s sales and expenses

- Sending a Self Assessment tax return every year

- Paying Income Tax on your profits and Class 2 and/or Class 4 National Insurance

How am I taxed as a sole trader?

No matter how you run your business, it’s incredibly important to know about the taxes you have to pay.

As of the tax year 2020/2021, the standard Personal Allowance is £12,500. This means that if you operate in the UK, this level of profit won’t be taxed. So if you’re a sole trader, you won’t have to pay tax unless you’re earning £12,500 or above. However, whether you need to pay tax or not, you’ll still need to complete a Self Assessment Tax Return.

You should also make yourself aware of tax bands as a sole trader. There are three basic tax bands: the basic rate, the higher rate and the upper rate:

- The basic rate tax band is 20% and applies to you if your income reaches £50,000.

- The upper rate band is 40% and applied to you if your income is between £50,501 to £150,000.

- The additional upper tax band is 45% and applies to you if you’re registering an income of £150,000 or more.

Paying National Insurance as a sole trader

Within three months of becoming self-employed – as you will be as a sole trader – you need to inform HMRC so they can make sure you’re paying National Insurance and provide the details required for you to complete a self-assessment tax return each year. You’ll need to apply for a National Insurance number if you’re moving to the UK to set up a business.

If you’re a sole trader, you may have to pay two types of National Insurance as you fall under the self-employed category:

- You’ll have to pay Class 2 National Insurance if your profits are more than £6,475 a year

- You’ll have to pay Class 4 National Insurance if your profits are more than £9,501 a year

You’ll be able to pay your National Insurance through the self-assessment form we previously mentioned. There are also some more specific rules that the government covers through their portal.