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It can be daunting to start your own business – especially when you’ve always had someone else take care of your taxes, NI and salary.

In the first of our blogs about starting a new business, Melanie answers some of the most frequent questions she gets asked about accountancy and bookkeeping when you’re a sole trader.

What is a sole trader?

A sole trader is someone who sets up and runs his or her own business as an individual. They can be called self-employed, sub-contractors or tradesman, and they usually don’t employ any staff – although you can do this if you’d like.

It’s the easiest and most popular way to run a business in the UK, with around three quarters of businesses registered as sole traders. A lot of people become sole traders when they’re just beginning to build their business, and some may even still have full time jobs. What are the benefits of going down this path?

You get a lot more freedom being a sole trader – it’s cheaper than running a limited company, and there’s a lot less paperwork.

You won’t need to pay corporation tax, and you have no legal requirement to have annual accounts or files ready for inspection – you just need a record of your business expenses and income for your tax returns.

All business decisions are down to you. And all the businesses profits are yours to spend – after tax of course!

Any downsides?

As a sole trader, there’s no distinction between you and your company, which can be challenging for some. You’ll be liable for any debts that stack up, and your assets, including property, could be put at risk. It can also be more difficult to get funding as a sole trader, so you may struggle to expand your business.

Depending on the sector that you work in, some agencies and contractors will only work with limited companies as they have slightly different legal protection. Do your research before deciding to register as a sole trader and make sure that you’re not going to lose out on work by going down this route.

What accounting or bookkeeping do I need to do, as a sole trader?

All sole traders have to pay tax on any profits their business makes after expenses – this is done via a Self Assessment tax return system. Expenses that you can deduct from your taxable income include paying for your work premises, travel and any bills that your business accrues.

You’ll also need to pay two lots of National Insurance, known as Class 2 and Class 4 contributions, to the Department of Work and Pensions. Class 2 payments are £2.70 a week (whatever your income or profit), while Class 4 payments are based on how much your business brings in – both can be paid by Direct Debit.

If your turnover, or taxable supplies go over £82,000 in a year, you’ll need to become VAT registered. This not only means more paperwork it also means that you’ll need to start charging your clients VAT – however, you will be able to claim any VAT back from any purchases you make.

Two key dates for your diary are 31January and 31 July – this is when you need to pay HMRC. January date is the final date for getting your paper tax return in after the end of the tax year. If you do advance payments on your bill (known as ‘payments on account’), July is when you make this payment. And if you’re VAT registered, this paperwork will need to be filed quarterly.

With all of these payments, you do get penalised if you’re late, so it’s definitely worth getting all your paperwork in before the deadline.

Any top tips for sole traders?

As well as getting your paperwork in on time (I cannot stress this enough!), it’s also worth putting some money away each month for your tax bills. A lot of people I speak to don’t do this and then have to find this money when a deadline rolls around. Keeping on top of everything will help save you money in the long run.

Here at Melanie Curtis Accountants, we can help you through all stages of running a business. Not only will we help you register and set yourself up as a sole trader, we’ll make sure your paperwork is all up-to-date, as well as make sure that you hit all deadlines.

We’re also here to give you jargon-free financial advice throughout the year, so any questions you may can be answered by one of the team. We want to help ensure your business, whatever it may be, is a success.