FAQ For Sole Traders

1. Can I switch to a different business structure later?
Yes, you can change from being a sole trader to another structure, like a company, as your business grows. Just make sure you understand why you want to switch, any potential downsides, the tax impacts, and the costs involved. It’s a good idea to talk to an accountant before making the change.

2. What is a sole trader and how is it different from being self-employed?
Being a "sole trader" refers to a specific way of running your business where you're the only owner. "Self-employed" means you're not working for someone else. Most self-employed people choose to be sole traders because it’s simple and inexpensive. If you run your business as a company, you are both the owner and an employee.

3. What do I need to do to register as a sole trader?
To set up as a sole trader, you need to:

• Get a Unique Tax Reference (UTR) for self-assessment

• Know or get your National Insurance (NI) number

• Register for VAT if your yearly income is over £90,000

• Register for self-assessment by 5 October after the tax year you started trading

4. How do I handle taxes as a sole trader?
When tax season arrives:

• Claim any business expenses

• Keep your business and personal bank accounts separate

• Understand what taxes you owe

• Save money to pay your taxes

• Use accounting software (like Xero) to keep track of your finances

• Consider hiring a good accountant (like Kernow Accountancy)

5. How much tax do I pay as a sole trader in the UK?
As a sole trader, your income is taxed as personal income:

• Income Tax: You have a tax-free allowance of £12,570. If your income is over £100,000, this allowance decreases.

• National Insurance Contributions:

  • Class 2: £3.45 per week if your profits are £6,725 or more each year

  • Class 4:

    • 6% on profits between £12,570 and £50,270

    • 2% on profits over £50,270

You need to file your tax return by 31 January if you file online, or by 31 October if you file on paper.

6. What are my tax obligations?

• VAT: Register if your annual income is over £90,000. You must charge 20% VAT on sales and can get VAT back on business purchases.

• Income Tax: You pay in two installments based on your previous year’s tax bill: one by 31 January and another by 31 July.

7. How do pension contributions work for sole traders?
You don’t have to join an occupational pension scheme, but you should think about a personal pension scheme. You contribute from your bank account after tax, and you can claim tax relief on these contributions. It's a good idea to talk to a financial adviser about this.

8. Can I hire employees as a sole trader?
Yes, you can hire staff. You must follow the same rules as any other employer, including checking that employees can legally work in the UK, paying into a pension scheme, ensuring they get their entitlements, and meeting health and safety regulations.

Who are Kernow Accountancy?
Kernow Accountancy is a family business that uses advanced technology to provide close support for your business. We have a team of accountants and bookkeepers who handle your finances so you can focus on growing your business.