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Sole Trader (Self Employed) vs Limited Company

When you decide to become self-employed, one of the first decisions you’ll need to make is to decide on a business structure: operating as a sole trader, or through your own limited company.

There are a few traits that identify sole traders: you’re taxed as an individual (and don’t pay corporation tax), you have unlimited liability (your business isn’t considered a separate legal entity) and you have sole ownership over your business.

There are several reasons why the sole trader structure is the most popular option among businesses in the UK. It’s easy to set up—all you need to do is to register as self-employed with HMRC, choose a business name, and you’ll be all set to begin trading.

And if you change your mind sometime down the road—whether you decide to stop trading or to change to a limited company structure—the process of termination or transition remains fairly simple and straightforward. Unlike with limited companies, there’s no need to take additional steps such as applying to strike off your company.

You’ll also enjoy full control over your business, as there aren’t shareholders you’ll need to answer to. Sole traders also have fewer compliance requirements compared to limited company directors, which means that you’ll benefit from less paperwork, greater convenience and lower accounting fees.

Switching from Self Employed to Limited Company

You started out as a sole trader—but as your business scales, there comes a point in time where it becomes more efficient to trade as a limited company.

There are a few reasons why sole traders decide to make the transition. 

Their profits may have grown to the point where it’s more tax efficient to trade as a limited company. They may decide it’s time to bring in shareholders or directors, or feel that their business could benefit from the increased credibility that a limited company structure brings.

Here’s what the process of transition involves: firstly, you need to decide if you’ll be the sole director. After which, you’ll need to notify HMRC of the change, select a business name, and register your limited company with Companies House.

Once the registration is complete, there are a few more items to cross off your checklist. You need to inform your stakeholders, set up a business bank account, set up your payroll, update your company details on your business documents and get your accounts sorted out.

Limited Company Filing Deadlines

Being a limited company director comes with several legal responsibilities. In addition to your statutory duties, you’re also responsible for meeting your filing deadlines.

These include:

  • File your Self Assessment by 31st January following the end of the relevant tax year.
  • If you’re VAT-registered, you need to file your VAT returns 1 month and 7 days after your VAT quarter end date.
  • File your company accounts 9 months after your company year-end. If you’re in your first trading year, your first annual accounts are due 21 months after your date of incorporation
  • File your Confirmation Statement up to 14 days after the due date. The due date is 12 months after the date your company was incorporated, or 12 months after the date you filed your previous Confirmation Statement. 
  • File your company tax return 12 months after the end of the relevant tax year.
  • If you’ve just begun employing staff or using subcontractors for construction work, you need to register as an employer before an employee’s first payday. 
  • If you already have employees, there are a number of deadlines you need to meet for your payroll year end
  • Submit your final payroll report for the year before your employee’s final payday for the tax year ending 5th April. 
  • Provide your employees with the P60 by 31st May (following the end of the relevant tax year). 
  • File employee benefits and expenses using your payroll software, and submit your P11D and P11d(b) forms by 6th July.
  • In addition to the payroll year-end deadlines, you’re also required to:

Send the FPS on or before your employees’ payday. The FPS must be submitted each time you pay your employee. This means that if your employee is paid weekly, you’ll need to make 52 submissions across the year.

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As a freelancer, bookkeeping is a vital part of your business. This is why it's essential to understand the importance of self-employed accounting software and how it can help you keep all your transactions in check.

In this article, we will explain everything you need to know about cash flow reports, mileage tracking, inventory tracking, and all the advanced features you can access through accounting software for freelancers. We'll also go through a few examples of how to track your business expenses, deal with bank transactions, and secure your financial data using these tools. So, let's get started!

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In this article, we'll cover everything you need to know about how you can claim tax-free childcare. We will also go through the scheme's eligibility criteria, the steps to apply, and some frequently asked questions that might come in handy when registering for this program. So, let's get started!

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Workplace happiness is a hot topic for every organisation. Happier staff lead to higher retention rates, which means less time and money is spent training and recruiting replacements. Which ultimately means running a more profitable business.

While large businesses invest heavily in staff retention and attraction to drive employee satisfaction, we wonder how self-employed people and contractors can apply the same philosophy and tools to their businesses and working lives. With no HR department and limited budgets,  these individuals are largely responsible for their own happiness at work.

Fortunately, it is possible to apply the principles of employee happiness that large organisations deploy to your own working life, even as a solo entrepreneur.

How does employee happiness apply to self-employment?

Work happiness is a straightforward concept. It refers to enjoyment and a positive attitude towards one's work. Happy people are excited to go to work, enjoy their work, and are more satisfied and engaged. Workplace happiness naturally impacts productivity and customer satisfaction in a positive way.

Many self-employed people may feel that happiness is a luxury that doesn’t apply to them. Self-employed business owners are far less likely to take mental health or sick days because it impacts their income. They are also more concerned with retaining their customers than their own fulfilment, which can lead to longer hours and burnout.

By refocusing on happiness at work, these self-employed individuals can boost their productivity, motivation and client service.

The FLARE Framework for Workplace Happiness and Employee Satisfaction

Very few of the factors that make employees happy at work are money. Most relate to the human aspects of work. Strong relationships, a good work-life balance, and feeling valued will always mean more to employees than incentives.

I've determined five factors that impact employee happiness, summarised by a simple acronym: FLARE. FLARE is shorthand for:

  • F - Flexibility and work-life balance
  • L - Learning and Development
  • A- Autonomy and Responsibility
  • R- Recognition and Reward
  • E - Environment and Culture

By ensuring that these five elements are implemented, self-employed business owners and contractors can improve their working lives considerably.

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As a sole trader, managing your finances effectively is important for your business success. One essential aspect of this is paying yourself a salary or drawing profits from your business income. You pay yourself through personal drawings from your business. We recommend that you use a business bank account, as you’ll need to keep records of these drawings, as well as of your sales and expenses.

Why Paying Yourself as a Sole Trader Matters

Paying yourself as a sole trader is not just a matter of personal preference; it's a fundamental aspect of responsible financial management and business sustainability and it matters for several reasons:

  1. Financial Stability: Paying yourself ensures that you have a reliable source of income to cover your personal expenses, such as housing, groceries, and other living costs. This stability contributes to your overall well-being and peace of mind, allowing you to focus more effectively on your business.
  2. Recognition of Your Efforts: As a sole trader, you are the driving force behind your business's success. Paying yourself acknowledges the hard work, time, and effort you invest in your business. It supports the idea that your work is valuable and deserves compensation.
  3. Budgeting and Personal Finance: Paying yourself regularly helps you create a structured budget for your personal finances. It allows you to plan for upcoming expenses, save for the future, and manage your financial responsibilities, such as taxes and retirement planning.
  4. Tax Obligations: Sole traders are responsible for paying income tax on the profits they generate. Paying yourself a salary or drawing profits allows you to set aside the necessary funds for tax payments. It helps you avoid tax-related stress and potential penalties for underreporting or underpaying taxes.
  5. Retirement Planning: Paying yourself can also be a crucial part of your retirement strategy. By consistently saving a portion of your earnings, you can build a retirement fund that provides financial security when you decide to stop working or pause your business activities.
  6. Business Viability: Paying yourself ensures that your business is financially viable in the long term. If you neglect to pay yourself and solely reinvest all profits into the business, you may find it challenging to manage your personal finances.
  7. Personal Motivation: You get personal motivation by paying yourself regularly. It gives clarity that your business is successful and capable of sustaining your livelihood. This motivation can lead to increased productivity and commitment to your business's growth.
  8. Credibility with Lenders and Investors: If you ever need to raise fund or seek investment for your business, showing that you pay yourself a reasonable salary can enhance your credibility with lenders and potential investors. It shows that you have planned your finances very well.
  9. Work-Life Balance: Paying yourself appropriately can contribute to a healthier work-life balance. If you consistently pay yourself, you may feel less pressured to work excessive hours or sacrifice personal time for the sake of your business.
  10. Legal and Tax Compliance: Operating your business without paying yourself a salary can raise red flags with UK tax regulations. It's important to establish a structured payment system for yourself to maintain HMRC compliance.

How Do I Pay Myself as a Sole Trader?

As a sole trader in the UK, you are essentially the business, and you have direct control over its finances. Paying yourself as a sole trader is straightforward, but it's important to keep your personal finances separate from your business finances for accounting and tax purposes. Here's a step-by-step process for paying yourself as a sole trader:

  1. Determine a Payment Frequency: Decide how often you want to pay yourself. It could be weekly, bi-weekly, monthly, or quarterly, depending on your preference and your business's cash flow.
  2. Open a Separate Business Bank Account: It's crucial to keep your personal and business finances separate. Open a dedicated business bank account to manage your business income and expenses. This will help you track your business finances accurately and simplify tax reporting.
  3. Record Business Income: Whenever you receive money from your business activities, record these transactions in your business bank account. Use accounting software like Freeagent or spreadsheets to keep track of your income sources.
  4. Deduct Business Expenses: Before determining your pay, deduct any legitimate business expenses from your income. This includes costs related to running your business, such as supplies, equipment, rent, and utilities.
  5. Calculate Your Net Business Income: Subtract your business expenses from your total business income to calculate your net business income. This is the amount you have available for both business reinvestment and personal income.
  6. Set Aside Taxes: As a sole trader, you are personally responsible for paying income tax and National Insurance Contributions (NICs) on your business profits. It's essential to set aside a portion of your net income to cover these tax obligations. Consult with an accountant to estimate your tax liabilities accurately.
  7. Pay Yourself: Once you've accounted for business expenses and taxes, you can pay yourself the remaining balance. You can transfer money from your business bank account to your personal account or take cash withdrawals, depending on your preference and banking arrangements.
  8. Keep Detailed Records: Maintain accurate records of all financial transactions, including your withdrawals or transfers from the business account. This will help you with financial tracking, tax reporting, and ensuring compliance with HMRC.
  9. Submit Self-Assessment Tax Returns: As a sole trader, you must register for self-assessment with HMRC. You will need to file an annual self-assessment tax return to report your income and pay any income tax and NICs due. It's essential to meet HMRC's deadlines to avoid penalties.
  10. Consider Pension Contributions and Savings: While not mandatory, it's wise to consider making pension contributions or saving for your future, especially since you won't have an employer-sponsored pension scheme. You can make personal pension contributions and benefit from tax relief on these contributions.

Remember that it's essential to keep your financial records accurate and up-to-date to ensure compliance with tax laws and to have a clear picture of your business's financial health. Consulting with an accountant or tax advisor can be helpful in navigating the tax implications of your sole trader income.

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To set up as a sole trader, you need to take the following steps:

After you’ve registered as self-employed, you’ll need to fulfill the following responsibilities as a sole trader:

1. Abide by HMRC's record keeping requirements

You need to keep records of:

  • Your sales and income
  • Your business expenses
  • Your personal income
  • VAT records, if you've registered for VAT
  • PAYE records, if you have employees

You need to keep your records for at least five years.

2. Submit a Self Assessment tax return each year

You''ll need to submit a Self Assessment tax return by 31 January each year.

An accountant like GoForma can help you with completing your Self Assessment tax return. You can learn more about the registration process, deadlines, late filing and payment penalties and Making Tax Digital for Income Tax on our Self Assessment guide.

3. Pay income tax and National Insurance Contributions

You'll need to pay income tax, as well as Class 2 and Class 4 National Insurance contributions.

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When starting a business in the United Kingdom, it's important to understand the various business structures available.

As a freelancer, contractor or small business owner, there are three main types of legal structures you should consider:

  • Sole proprietorship
  • Limited company
  • Working through an umbrella company

A sole trader, or sole proprietorship offers simplicity and independence for individuals starting their own ventures. In this comprehensive article, we will understand the sole trader meaning, examples, advantages, disadvantages, registration process, and tax considerations for sole traders. Let's first understand what is a sole trader.

When starting a business in the United Kingdom, it's important to understand the various business structures available.

As a freelancer, contractor or small business owner, there are three main types of legal structures you should consider:

  • Sole proprietorship
  • Limited company
  • Working through an umbrella company

A sole trader, or sole proprietorship offers simplicity and independence for individuals starting their own ventures. In this comprehensive article, we will understand the sole trader meaning, examples, advantages, disadvantages, registration process, and tax considerations for sole traders. Let's first understand what is a sole trader.

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