The basics of being a Sole trader

Written by Drew Coles, member of the chartered institute of Management Accountants.

Self employed written on blocks
There are several things to know and do when you first sign up to be a sole trader. This article will go through some of the basics and will also provide information on what being a sole trader means.
Risk vs reward on scales

Unlimited liability

There is no distinction between your money and the money of the business. To summarise if your business is in debt you are personally in debt too. This is different for a limited company whereby the company’s funds and the owners are separate from each other.


Companies House

It is worth noting that if you are a sole trader you do not need to register your company to company’s house. You must only register your business with companies’ house if you are limited corporation.


HMRC logo

HMRC

One of the first things and most important actions you need to do is sign up to HMRC for self-assessment tax (SA) returns. To do this all you need to do is call the HMRC ‘Helpline for the Newly Self-Employed’ on 0300 200 3504. There is a deadline of 5 October 2018 to register for new sole traders, if you register late you risk being fined £100. The SA will be due at the end of the tax year being 5th April.

Accounting periods

You profit will be taxable over an accounting period. Usually in the case of sole traders this would be the actual tax year April to April however depending on your start date the accounting period could be any 12-month period during the year. It is worth noting the first tax return will be different as the will be a shorter or longer taxable accounting period. It is always worth mentioning that once the Accounting year is set it shouldn’t be changed. For example, if your run your business from October to September your accounting period should always start and finish on these dates.
Accounting periods with associated words
Self assessment checklist

Self-Assessment tax returns

As noted above you will need to declare your profits in a self-assessment at the end of each tax year. There is also a time limit when these tax returns need to be completed therefore it is important to be on top of this at year end. At the time of writing the deadline for filing online self-assessments is Midnight 31 January 2019 for tax years ending April 2018. You will also need to pay any tax you owe on this same date.
On the tax return you will need to declare interest earnings from savings and if you’re a basic rate taxpayer you’ll be able to earn up to £1,000 in savings income tax-free. Higher rate taxpayers will be able to earn up to £500. This is called the Personal Savings Allowance. You will also need to declare earnings taken through PAYE if you have a second job and of course the business revenues, expenses and profits for the year.

Tax and National Insurance on earnings

As a sole trader you will be taxed on your profits before tax after deducing all business expenses, cost of sales etc. Your profit will be taxed as per income tax rules and will be applicable to the same earning brackets as PAYE. You will also still be able to claim your personal allowance which is £11,500 tax free against your profits for the year.
National insurance will also need to be paid as per your earnings. Class 2 and class 4 national insurance is payable for Sole traders. Class 2 NICs are charged as a flat rate throughout the year (£2.85 a week for earnings over threshold of £6205). If your annual profits are more than £8,164, you’ll also have to pay Class 4 NICs (9% on profits up to £45,000; 2% on annual profits above this figure)
Tax cut by scissors

VAT

You will need to register for VAT if your annual turnover exceeds the VAT threshold which is £85,000. You must register for VAT straight away if you believe your turnover will exceed this amount in near future. After registration you will need to keep VAT transaction details, add VAT to all your invoices and record purchase VAT. This is easiest to record using Bookkeeping software such as Sage which will also allow you to submit your VAT through the government gateway.

Tax planning

It is prudent to plan for the tax payable in January each year. A general rule would be to deduct 20% of your earnings each month and put them into a savings account for the tax payable. A good accountant will be able to forecast the tax payable at year end considering forecasted sales to enable you to get a good idea of the amount you will need to pay.

Tax planning on blocks

Accounting

You will need to keep good records of business transactions and take care of the bookkeeping. This is the recording and allocation of business transactions for tax purposes to keep a record of revenues, expenses and profits and is required by law. You will need to keep all supporting information such as invoices, receipts, bank statements. There are several ways to do this including:
· Recording the figures, yourself on an Excel spreadsheet. This method is cheap but time consuming and you still need to consider the cost of an office 365 subscription.
· Using an Accountant to do the bookkeeping for you. This is the easiest method but probably the most expensive. It will reduce the amount of time you need to spend on your accounts and let you concentrate on earning more money. Have a look at our bookkeeping packages here.
· Using Accounting software to do the bookkeeping yourself. This method is a sensible one. It will take less time to complete your bookkeeping on accounting software as opposed to excel. You will also be able to take advantage of accountants support if you choose one of these packages.
It is worth noting that you need to keep all accounting records and supporting information for six years plus the current year for tax purposes

Accounting on a white board

Cash Management

Cashflow is one of, or the most important aspects of the business. Most businesses fail because of poor cashflow even profitable organisations. Why is cashflow so important? Because purchases need to be made before items or services can be sold and while you are waiting for the customer overheads need to be paid and this is before offering business credit terms which will delay cash inflow even further. Therefore, it needs to be carefully managed and a healthy bank balance is imperative to start your new business. The easiest way to manage your cashflow would be to use a cashflow spreadsheet created on Excel to track your outgoings and incomings over a future period. We can do this for you by using our financial management services here. The next best way to achieve this is to use Sage accounting software which automatically generates a cash flow forecast for you by tracking your previous transactions.

Budget on paper with graphs

Budgets

Is it worth producing a business budget if you’re a sole trader. My answer is yes because of the following reasons:
· A budget can be simple and use only a few material figures to compare to actual results
· It gives you a comparison to how well the business is performing
· It gives you a target to aim for and helps motivate you.
· It helps you investigate if expenses and costs are higher than expected at the beginning of the period
If you need help producing these budgets we have a dedicated finance management service available here

summary on white board in blue

Summary

Being a Sole trader can be tough not only do you need to carry out the work you also need to market your business, advertise as well as track your cash flow and record all transactions as above. Lastly it might be worth outsourcing some of these aspects to specialists such as the marketing using Google AdWords specialists for example, the more time you can spend working on your business and not get distracted the more money you can generate.

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