What is the definition of a Sole Trader and being Self-Employed What is the definition of a Sole Trader

Is there any difference between a ‘Sole Trader’ and being ‘Self Employed’?

 Being a sole trader is the sensible legal choice for many businesses

Being a sole trader is the sensible legal choice for many businesses

This article, originally produced for SmallBusiness.co.uk on 21/05/07, was updated on 16/06/15 due to legislatory changes 

If you are self-employed then this means you work for yourself, and not for an employer. A sole-trader is a self-employed person, but they are the sole owner of their business.

Within three months of becoming self-employed you need to inform HMRC so they can ensure you are paying Class 2 NICs and you fill in a self-assessment form.

Company directors are not self-employed. Many directors are employees of their company and will be paid as employees in the normal way.

Registering as a sole trader

Being a sole trader is the simplest way to run a business, and does not involve paying any registration fees, but you must register as self employed.

Keeping records and accounts is straightforward, and you get to keep all the profits.

The difference is that you are personally liable for any debts that your business runs up, which can make this a risky option for businesses that need a lot of investment.

It is easy to start up as a sole trader. Simply register with HMRC within three months of the month you started up. They will also then send you the form you need if you decide to register for VAT.

Setting up a business: Sole trader vs limited company

A sole trader’s accounts

As a sole trader and a conventional partnership, your accounts must follow accepted accounting practice to give a true and fair picture.

But the exact form of accounts is not laid down by law. In practice, this means you do not have to produce a balance sheet.

It would, however, be advisable to do so to impress your tax inspector or bank manager and to help you to keep a proper check on the financial position of your business.

It is possible to do your own accounts rather than employ an accountant.

If your business is very simple, you could set up your own accounting system using a spreadsheet, but generally it is better to use an off-the-shelf software package.

Getting your accounts audited as a sole trader:

As a sole trader you do not have to get your accounts audited, if you do not want to.

You may consider doing so, if the cost would not be too exorbitant, as it can help in dealings with your tax inspector.

It may also help you if you need confirmation of income from your business – for example, to get a mortgage to buy a house or make contributions to some personal pensions.

Paying tax and national insurance as a sole trader:

As a sole trader you pay two types of national insurance contribution (NIC). If your earnings are above a lower threshold, which is £5,965 for 2015/16, you pay Class 2 contributions at a flat rate of £2.80 a week in 2015/16.

In addition, you pay Class 4 contributions as a percentage of your profits. In 2015/16, Class 4 NICs are 9 per cent of profits between £8,060 and £42,385 and an additional contribution of 2 per cent of profits above the upper profit limit.

The business of a sole trader does not have a separate identity from the individual concerned.

So your profits are added to any other taxable income you have and subject to income tax if the total comes to more than your personal allowance.

Further reading on sole trader’s

Comments (4)

Anonymous

Sole Trader and Self Employed are exactly the same. You just start your business and let the Inland Revenue know (and Customs and Excise if you think your sales will be big enough to take you over the VAT threshold).

Anonymous

That's right, there are various ways of starting a business and becoming self-employed. Sole-trader status is one of them. Click here to find out how to register as a sole trader.

Anonymous

I want to get a trader insurace and drive vehicles for a garage on a self employed basis. What do I need to do for this?

Anonymous

how do u register as a sole trader?

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