Who is a sole trader?

Basically, a sole trader runs their business on their own. There is no legal distinction between the owner and the business partners. They can hire employees according to their needs as there is no rule of working alone. When you are a sole trader or sole proprietor, you keep all your profits after paying your taxes.

Sole trader tax

The meaning is simple, the tax paid on the business profits without adding the expenses by the sole trader. The sole trader can take out cash from the business without tax. The sole trader can have two separate accounts, one for business accounting and another for personal tax accounting; they can claim tax relief on interest and charges. In the event that a sole trader sells his or her business or assets, the proceeds will be subject to tax. However, sole proprietors receive tax relief for expenses incurred wholly and exclusively for the company.

How do you go about registering as a sole trader?

Registering as a sole trader is a straightforward process. First, you must register for self-assessment online on their website as self-employed.Each year, tax returns are due between 6 April and 5 April. After submitting the details to the HMRC (Her Majesty Revenue and Customs), they will send you the confirmation letter with a 10-digit activation code UTR (Unique Taxpayer Reference) with your roles and responsibilities as a sole trader.

Do sole traders pay income tax too?

Understanding the various Income Tax and NIC rates enables you to effectively manage your finances and pay the appropriate amount to HMRC. You can keep track of your income, balance it to fit within the relevant categories for all payments due by HMRC, and maximize the amount you get to keep. The self-employment income of sole proprietors is used to determine their income tax obligations (minus disallowable expenses). You can get assistance from income tax accountants with your taxes and tax returns.

Thank goodness, not all of your income as a sole proprietor is subject to tax. You won’t pay any tax if your total taxable income, which includes any additional sources of income like employment or rental income from real estate, is less than your Allowance; that’s it.

Below are the current income tax rates:

Personal Allowance: the first £12,500 are tax-free (until your income exceeds $100,000, in which case you forfeit £1 of the personal Allowance for every $2 you make). Basic rate tax: £1-£37,500 (20% tax after personal Allowance is subtracted) Extra rate tax: 40% tax on taxable income over £37,500. Tax at a higher rate: 45 percent of taxable income beyond £150,000. Remember that the personal allowance rate decreases by £1 for every £2 taxable income over £100,000 per year. There are also sole trader tax accountants who will guide you if you are a beginner and help you with all these pieces of information.

Role of sole traders in NIC (National Insurance Contributions)

As a sole proprietor, you must also pay national insurance contributions and income tax (NICs). Your required payment is based on your level of income. There are now two NIC categories that sole proprietors must pay. If your profits exceed £6,725 (2022–23 Tax Year), you must pay Class 2 NICs, which cost £3.15 per week, and Class 4 NICs. Your obligation is determined by how much money your business produces; it is 10.5 percent on earnings between £9,880* and £50,270 and 3.25 percent on earnings above this. The lower threshold for Class 4 NICs will rise from £9,880 to £12,570 as of July 6, 2022. For the entire tax year, this implies that if your profits are £11,908 or less, you won’t have to pay any Class 4 NICs.

Are there any expenses that a sole trader can claim?

By claiming your business-related expenses on your Self Assessment tax return, you might be able to lower this tax obligation. Most independent contractors have some expenditures in common. Two prime examples are office supplies and personal computers.

The necessary home office materials can be deducted from your taxes if you keep track of your money, write appointment notes, or conduct Zoom conversations (as long as they are used only for work-related activities).  Expenses for a single trade also tend to be more specialized. If you work as a personal trainer, you might deduct your gym fees or any marketing expenses for your classes. Like other professionals, beauticians can deduct their studio rent and equipment expenditures because they were bought specifically for their line of work. Whatever you do, keep a record of the costs you’re seeking as reimbursement. In order to assist in an investigation, it is important to keep all permits, bank records, and invoices.

What are some of the pros and cons of being a sole trader?

Pros

• Simple to assemble and disassemble
• Fewer court documents than a limited company
• The preparation of financial statements is optional.

Cons

• There is no distinction in the law between your company and you.
• unlimited responsibility; use of your assets to pay off debts
• You might still need to submit a business name to the Companies Registration Office for registration.
• Your entire income (after deducting expenses) is subject to tax, resulting in a rate of up to 55%.

a small window for tax preparation

• You must still file a tax return each year.
• Some contracts only applicable to Limited Companies may not be available to you.
• decrease in the likelihood of obtaining grants or credit

Here is a link that will tell you more about SMSFs