To set up as a sole trader is very simple which explains why it is the most popular legal structure in the UK. You need to set up as a sole trader once you have earned more than £1,000 from self-employment in any one financial year (between 6th April and 5th April).

To set up as a sole trader, you will need to inform HMRC that you pay your tax through Self-Assessment. You will need to file a tax return every year. The financial year runs from 6th April to 5th April. i.e. any income received from self-employment between 6th April 2020 through to 5th April 2021 will be need to be reported to HMRC by completing a self-assessment. You have until 31st January the following year, in this case until 31.01.22 to submit a self-assessment. If your return is late, HMRC will issue penalties.

You can simply click on the link below to register for self-assessment.

https://www.gov.uk/log-in-file-self-assessment-tax-return/register-if-youre-self-employed

Limited liability

One of the biggest benefits of operating as a limited company instead of a sole trader is that a limited company has the benefit of limited liability. This is because incorporation forms a legal distinction between the business owner and their business. This means that personal assets are not threatened should you get into difficulty, and you only stand to lose what you have put into the company.

Tax efficiency

Often, limited companies stand to be more tax efficient than sole traders. This is because the profits of the business will be split between a personal tax return and a company tax return. We generally put our directors on a payroll, paying them approximately £8k per year. Money taken over this threshold would be classed as dividends. We all have a personal allowance which currently stands at £12,500. In addition to this you can take £2k worth of dividends tax free, which in essence takes your personal allowance up to £14,500. Therefore, you can earn £14,500 through your limited company before you pay personal tax. Dividends are taxed at 7.5% instead of the tax rate of 20% used for sole traders. The reason for putting directors on the payroll is that this will be a direct expense to the business, thus bringing the corporation tax liability down. Dividends are not seen as a direct expense so will not decrease the corporation tax liability.

So we have covered the personal tax. Now we need to look at the company tax. As mentioned above, this is called Corporation Tax. This is paid on the profits of the business. The profit of the business is calculated by taking the sales figures and deducting the expenses figure. This leaves you with your net profit. Corporation tax is charge against the net profit at 19%.

Another benefit of trading as a limited company is that you have a far wider scope of expenses that can be claimed for, thereby, bringing the profit of the business down, bringing the tax liability down.

Probably one of the most attractive reasons for setting up as a sole trader is the simplicity of it. This is both in terms of set up and running the business. There is less paperwork involved with trading as a sole trader. The cost for your year end accounts i.e. self-assessment, will be considerably less than the cost of year end accounts for a limited company.

Sole traders are offered greater privacy than an incorporated business whose details, as mentioned above, can be found via Companies House.

Based on the tables above, as a Limited Company your take home money after tax has increased by £1,557.14.

The best advice when deciding which legal structure you want to use for your business is to say “do not rush into any decision and speak to an accountant if you are unsure which structure will be best for your business”.