If you start a business on your own and operate the business without incorporating it as a limited company then you are referred to as a sole trader.
The term sole trader is interchangeable with being self employed.
Taxes paid by the self employed
If you are self employed you will pay the following taxes:
Income tax is paid on your profits.
Profit = Income less allowable costs
Your accounts, which would be used to complete your self assessment, should show how you have arrived at your profits.
One of the reasons for registering as self employed is that you will need to start paying National Insurance in a different way than if you were employed.
As a self employed person you will pay the following National Insurance contributions:
If your profits from your self employed business exceed more than £6,025 (2017 / 2018) per year you will pay Class 2 National Insurance at a rate of £2.85 (2017 / 2018) per week. This will be collected via your self assessment tax return.
Note – Class 2 is under review by HMRC and may soon be abolished. As and when things change this will be updated.
Class 4 National Insurance is paid if your self employed profits exceed £ 8,164 per year (2017 / 2018).
The amount due is 9% on profits between £8,164 and £45,000 and then 2% on profits over £45,000 (2017 / 2018).
Class 4 contributions are paid along with your income tax using the Self Assessment tax return.
You complete a self assessment each year and declare the income, costs and profits from your sole trader business via the SA103 Supplement. Even if the profits you make from your self employed business fall below the annual personal allowance (the amount you can earn before you have to pay tax) you still need to complete a self assessment.
If your profits are below the amounts equivalent to the VAT registration threshold then you can complete a short version of the self assessment supplement (an SA103S). Not only this but you can limit your financial entries to box 9 (your business income) and box 20 (total allowable costs).
This means that your accounting can be very straight forward; in fact you can just record all of your income and all of your costs, total them and put them on the self assessment.
Of course, for your own benefit, you may wish to analyse your income and costs by appropriate headings to help you monitor your business, assess your profitability and control your costs.
The advantage of operating as a sole trader is that the administration is by far the simplest of any business structure. The disadvantages are that you have unlimited liability meaning that if the business fails with debts then you are personally responsible for settling those debts which could put your personal assets at risk; although you may be able to minimise this risk by talking out appropriate insurance.
For those operating at higher profit levels, the taxes due as self employed can be more than if you operate your business as a limited company. So it is worthwhile regularly reviewing your business structure, your exposure to unlimited liability, your profit and the projected amount of tax that you will pay.
Register as Self employed
As soon as you start your business you need to register with HMRC for self assessment.
This must be done even if you already complete a self assessment tax return for other reasons.
HMRC explain how to register at:
The key dates you will need to be aware of for your self employed accounts and tax are:
- 31 October for submitting a paper self assessment return and to have the tax calculation done by HM Revenue & Customs
- 31 January for submitting an online self assessment return
- 31 January for payment of Income Tax and Class 4 National Insurance for the previous accounting year.
For example for the year ended 5 April 2017, you will pay your Income Tax and Class 4 National Insurance on 31 January 2018.
In addition, if applicable, payments on account will be made on 31 January 2018 and 31 July 2018.