10 things you should know about setting up as a sole trader

The UK recorded around 3.5 million sole traders in 2020 – is your business next to join the list? Setting up as a sole trader provides you with unique benefits as well as certain drawbacks when compared to other businesses. 

If you’re not yet sure which business type is for you, read on to find out 10 things you should know before setting up as a sole trader, including vital tax information, investment opportunities and rules you’ll need to follow.

1. What is a trading allowance?

Sole traders have access to a trading allowance. This is a tax-free allowance of up to £1,000 that new business owners can earn from their gross profits. If you earn above this threshold, you must declare your self-employed income and file tax returns through Self Assessment with HMRC

This allowance is only available to sole traders and is aimed at removing red tape in the way of starting a business. Learn more about how to take advantage of this tax-free amount using our article What is the trading allowance?

2. What is a personal allowance?

Even if you earn above your trading allowance, you’re still entitled to a tax-free personal allowance on your business’ net profits, currently placed at £12,570. 

And so, although this personal allowance is available to everyone (therefore, if you stay in employment or become a company director, you’d still have access to it), you should use it to its full extent as you’re managing your business’ finances. Find out more about how to use your personal allowance in our article What’s the personal allowance for the self-employed?

3. What does ‘marginal tax’ mean?

As a sole trader, you pay income tax on your profits above your personal allowance. Income tax is calculated marginally, meaning your income is taxed at different rates if it crosses into certain thresholds: 20%, 40% and 45%. 

This is important to know because sole traders and limited companies pay different taxes. Therefore, it’s crucial to know how to keep your business tax compliant. Find out when your business will start paying tax here.

4. How your National Insurance is different

While we’re talking about taxes on your employment, national insurance contributions NICs) change if you become self-employed. If you’re currently working a job, you’ll pay Class 1 NIC, however, this changes to Class 2 and 4 on your self-employed income. Learn more about NIC in our comprehensive guide for further advice.

5. How to name your business

Sole traders have specific rules placed on what they can name their business. Specifically, they can’t be offensive, similar to another business’ name, or include terms like ‘Ltd.’ or ‘Limited’. For help on how to name your new business, read our article How to register as a sole trader.

6. What records you need to keep

Like many businesses, you’ll need to keep records of your finances but being a sole trader means your admin is a little lighter. You’ll need to keep records of: 

  • The income and expenses of your business
  • Records about any additional income you make that’s not from your business
  • PAYE records for anyone you employ (find out more below)
  • VAT records (but only if you’re registered for VAT)
  • Grant money you may have received in 2020-2021 if you claimed through the Self-Employment Income Support Scheme because of coronavirus

From 2023, if your business grows and you earn more than £10,000, you’ll need to use digital accounting software like Countingup to keep your records accurate and traceable. Find out more about why in our article What is Making Tax Digital?

7. How to use business assets for personal use

As a sole trader, the line between ‘you’ and ‘the business’ is a lot closer than it is for directors of limited companies. You’re able to use your business assets without having to declare this to HMRC. 

Fortunately, you’re also able to expense the cost of your business usage from the total cost of the asset. Find out how in What expenses can a sole trader claim?

8. Can you have shareholders?

As you’re starting a business, you might hear a lot about shareholders and investors. However, sole traders aren’t able to sell equity (or portions of their business) to investors for money. Instead, sole traders can take out loans from banks or through government grants. 

Sole traders are personally liable for the debt they take on for their business and this is one of the more difficult elements of running a business as a sole trader. Use the following links to find out different ways you can fund your business and which options might be best for you.

9. Can you hire staff?

Yes, whether you need someone to man the phones or help with shipping orders as your business grows, sole traders can take on staff to help lighten the workload. 

You’ll need to register as an employer and meet the seven requirements listed by the UK government here, including paying above the national minimum wage and paying for employers’ liability insurance

If you think you’ll need an extra set of hands and need a policy, we’ve partnered with insurance provider Superscript to bring five-star Trustpilot-rated cover at competitive prices. Click here to get a quote in minutes.

10. How you can protect your business

As you’re advertising your business, you may be using a unique business name, colours or branding that you’d like to protect, so customers know these elements are yours and yours only. You’ll need to register your name as a trademark and consider using other legal protections like patents to help keep your business competitive.

Keep on top of your business finances with a simple app 

Setting up as a sole trader and launching a business is an exciting time but too often, new entrepreneurs get lost in keeping their financial records accurate. 

Countingup is the business current account with free, built-in accounting software. The simple app automates financial admin for thousands of sole traders across the UK. 

Countingup provides real-time profit and loss insights, customisable invoicing and expense categorisation so that you can gain complete confidence that you’re on top of your business’ finances. Find out more here and sign up for free today. 

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