What to consider when working as a self-employed sole trader

Knowledge base from Boox

By Lynne Gowers on 16th November 2016

What to consider when working as a self-employed sole trader

With around 1 in 7 workers in the UK working for themselves, being your own boss is an increasingly popular career path. Much of the appeal is in the flexibility and freedom it offers. You get to choose when and where you work and the people you work with and for.

Firstly, let’s have a look at the terminology. Is there any difference between being self employed and being a sole trader? In short, not really.

“Sole trader” describes your business structure, while “self employed” means that you don’t work for an employer or pay tax through PAYE. In most cases, both terms are applicable – if you are self employed then you are basically running a business as a sole trader, regardless of whether you think of yourself as a business owner.

Another option is to set up a limited company, and be employed by it as well as being its director.

In this guide we outline the key factors to consider once you make the decision to strike out on your own.

Laying down the groundwork

Once you have decided to go self employed, good preparation and planning will go a long way to ensuring your success. This includes:

Financial security

Everyone has certain regular commitments, mortgage, rent, bills etc., so ideally you should have sufficient financing in place to see through the cash flow peaks and troughs that comes with self employment.

Self discipline

Looking ahead and managing your time effectively is crucial when you are working for yourself. You need the motivation and commitment to work every day but also to make sure you know when to take a break.

Organisation

When you are self employed there are lots of pulls on your time other than your actual day-to-day work. You are responsible for all of your financial, legal and tax administration. Our specialist sole trader accounting service takes much of this hassle away. Find out more.

Sole trader V Limited company

When people first start working for themselves, setting up as sole trader can be a straightforward and simple way of doing it. There is minimal administration and setup costs compared to that of a limited company, however there are downsides too.

Pros of operating as a sole trader

  • No / minimal setup costs
    You don’t need to register with Companies House as you are not operating a limited company. You will need to inform HMRC within 3 months of commencing trading.
  • Less paperwork
    There is less admin involved because there are less statutory obligations than running a limited company. Your accounting will also be simpler, although you will still need to keep detailed records of invoices and expenses and submit an annual self assessment tax return.
  • Full control
    You are your business and as such you have full control without having to consult other directors or shareholders. This means that you retain all the profits you generate.
  • Privacy
    With a limited company, all information, including accounts and directors’ details is in the public domain (although the amount of information made public can be limited to a certain extent). Sole traders do not have to make their information public. 

Cons of operating as a sole trader

  • Status
    Some companies and recruitment agencies will typically not engage with sole traders and clients often perceive limited companies more favourably.
  • Managing Tax and NI
    As a sole trader you need to be scrupulous in setting aside appropriate amounts in order to meet your tax and NI liabilities. Depending on your circumstances you may or may not end up taking home less than you would using a limited company.
  • Liability
    As a sole trader you are personally liable and  therefore your personal assets could be risk if the business fails. Alternatively if you are working through a limited company, only the amount invested in the company is at risk.
  • Funding
    As a sole trader it can be more difficult to secure investment. Lenders may perceive limited companies to be more established and less of a risk.

What you need to do to start trading

✔ Register as self employed with HMRC. You can do this here.

✔ If your turnover exceeds the VAT threshold you will need to register for VAT. You can do this here.

✔ Keep accurate records from the outset, including all invoices, receipts and bank statements.

✔ Consider taking out business insurances. Policies such a public liability and professional indemnity will protect you if someone puts in a claim as a result of an error or omission you have made in your work.

✔ Engaging a reputable accountancy provider, with specialist sole trader experience, can save you time and money.

Ask us about our dedicated self employed and sole trader accounting services.

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Disclaimer
Although we attempt to ensure that the Information contained in this publication is accurate and up-to-date at the date of publication it may not be comprehensive, we accept no liability for the results of any action taken on the basis of the information they contain and any implied warranties, including but not limited to the implied warranties of satisfactory quality, fitness for a particular purpose, non-infringement and accuracy are excluded to the extent that they may be excluded as a matter of law.

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