Self Employed & Sole Trader Accounting

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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.

Self Employed Registration Guide

Self Employed Registration Guide

  • What is a Sole Trader?
  • Sole trader advantages
  • Sole trader disadvantages
  • How to register self employed
  • Sole trader responsibilities
  • Self employed tax
  • Important self employed deadlines
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How to register self employed with HMRC

How to register self employed with HMRC

From starting your side business to going freelance full-time, becoming self-employed can feel scary and exciting all at once.

Before you jump right in, you need to ensure that you're staying on the right side of the law- and this begins with registering as self-employed with HMRC.

In doing so, you can be sure that you're paying the right amount of income tax and National Insurance Contributions, and thereby avoid paying unnecessary financial penalties.

Ready to get started? We've got all the information you need below:

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What is a Sole Trader: Meaning & Definition

What is a Sole Trader: Meaning & Definition

7 Characteristics For Defining Sole Traders

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8 Advantages of Being a Sole Trader

8 Advantages of Being a Sole Trader

7 Advantages of Being a Sole Trader

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What is a sole trader?

What is a sole trader?

If you're planning to start out on your own, one of the most important decisions you'll need to make is figuring out how you should structure your business.

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

It's a decision that requires careful consideration, and it's important that you seek advice from qualified professionals when you weigh out the pros and cons of each business structure. To begin with, you need to have a good grasp of the basics-and here's where our guide comes into the picture.

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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.

Registering a Limited Company Guide

Registering a Limited Company Guide

  • What is a Limited Company
  • 10 step process for setting up a Limited Company
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How to set up a Limited Company

How to set up a Limited Company

When you set up a limited company, you'll enjoy many advantages you don't get as a sole trader. Not only is it a tax-efficient way to run your business, it's also a great way to limit your personal liability and increase your credibility with customers. Additionally, it could open new avenues of work that wouldn't be open to you if you were operating as a sole trader, especially some contractor roles.

One of the disadvantages of running a limited company is that it involves a lot of paperwork, but with the help of this guide, we'll clear away the jargon and tell you exactly what you need.

If you're unsure about whether a limited company is right for you, check out our handy article comparing the differences between Limited companies and Sole Traders to see which business entity is right for you.

If you've got more important things to do than dealing with extra admin, you can always take advantage of one of our accountancy packages and we'll do all the forms and applications for you.

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What type of business structure is best for you?

What type of business structure is best for you?

If you're looking to the future with the hopes of beginning a journey running your own startup, chances are you're feeling some mixture of excitement, trepidation, and uncertainty when it comes to the finer details of your plan.

Starting your own business is an immensely fulfilling process and an excellent means to flex your creative muscles, but there's a lot of humdrum of business behind the process of turning a vision into a dream.

One of the most important (and one of the earliest) decisions in this process will centre around your business's formation. You'll have to select which type of business structure best suits your goals for the future.

While the choice may sound easy, you'll be well-served by giving the decision ample consideration. The business structure you select will have measurable implications on the way you make money and do business. It'll impact:

  • How much tax you pay
  • Your degree of personal liability should the business fail
  • How much administrative work is involved in the business (both before it comes to fruition and over the course of its life)
  • Your ability to finance and fund your efforts

If you make the wrong selection when it comes time to choose a business structure, you could be faced with a myriad of complications in the future.

Paying professionals for guidance and advice once things go wrong is costly and, for many, an embarrassing affair-performing research well in advance will ensure you're making the best choice for your company and that you can avoid losing out on money or pride later on.

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3 Ways to Register Your Company for Free

3 Ways to Register Your Company for Free

Registering a company is a one off cost of £12 and done through Companies House. However, there are a few different ways that you can get this fee waved with other business services that you need.

We'll walk you through how to register your company for free and the perks that you'll get with each.

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Advantages of a limited company

Advantages of a limited company

What are the advantages of a private limited company?

In the UK, the majority of self-employed people operate as sole traders. While there are many advantages to being a sole trader, you could take home more money and give your business a professional edge by setting up as a limited company.

In this article, we'll look at the advantages of operating as a private limited company to see how it could benefit you. If you're interested in seeing whether a limited company could be a good option for your business, check out our Business Structure guide. If you're already operating as a sole trader, making the jump to a limited company is more straight forward than you think.

Advantage 1 ‚- You pay less tax and National Insurance Contributions

Who can turn their nose up at the prospect of increased take-home pay? Well, that's the principle benefit of setting up a limited company and one of the main factors that drive people to switch from a sole trader.

As a director of a limited company, the way you pay tax is different from how you pay as a sole trader. As a sole trader, you'll pay 20% or more on everything you earn over the tax threshold. As a limited company, you typically pay yourself a small salary so you incur as little personal tax as possible. The majority of your income will come in the form of dividends that are taxed at a much smaller rate, meaning you're able to maximise your take-home pay.

As well as the tax benefits, paying the majority of your income through dividends means that you're able to pay less National Insurance Contributions (NICs) as these do not apply to dividend payments.

Example - Here's a quick comparison of the difference in take-home pay for a sole trader and a limited company.

  1. Sole Trader

    Revenue: £40,000

    Expenses: £1000

    Tax at 20%: £5,300

    Class 2 NIC: £158.60

    Class 4 NIC: £2,655

    **Take-home pay: £30,886.40

    **

  2. **Limited Company

    **Revenue: £40,000

    Expenses: £1000

    Corporation tax: £5741.04

    Dividend tax at 7.5%: 1,406.92

    Take-home pay: £ 31,852.04

As you can see, you save £965.64 as a limited company. What's not to like?

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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.

Tax return and payment deadlines you need to know

Tax return and payment deadlines you need to know

Tax season can be stressful for small business owners.

You don't have the convenience of having an employer filing for you. While there are all kinds of tips and strategies for managing your taxes, the first order of business is to get key deadlines noted on your schedule, and determine how and when to make your payment.

Here's what you need to know:

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What deadlines do I need to know as a contractor?

What deadlines do I need to know as a contractor?

As a contractor running your own limited company, you need to be aware of the following deadlines:

  • File end of year accounts to Companies House: 9 months after your company year ends. If it is your first year, the due date will be 21 months from the date your company was incorporated.
  • File your confirmation statement: This is due on the anniversary of incorporation each year
  • File your corporation tax return: This is due 12 months from your company year end.
  • Pay your corporation tax bill: Payment is due 9 months and 1 day after the end of the company year
  • PAYE RTI (Real Time Information) Returns: A submission of your company payroll has to be submitted in real time each month to HMRC. This is due on or before the intended salary payment. Any tax due from this can be payable on a quarterly or monthly basis as follows:
  • the 22nd of the next tax month if you pay monthly
  • the 22nd after the end of the quarter if you pay quarterly
  • VAT returns: Usually submitted on a quarterly basis, the company VAT is due to be filed and paid within 1 month and 7 days from the quarter end.
  • Self Assessment tax returns: Your Self Assessment Tax Return is always due to be filed by the following 31st January after the end of the tax year. This date is also the same deadline for payment of any tax due but you may also have a payment on account due by 31st July after this.
  • P11D: The submission of the company P11D will need to made by 6th July with any payment of National Insurance arising due by 19th July (22nd if paid electronically)
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Can I change my company's accounting date / year end date?

Can I change my company's accounting date / year end date?

You can change your company's year-end-otherwise known as the accounting reference date (ARD). Changes can be made to your current financial year or the year before.

Your company's financial year can be shortened as many times as you want, with the minimum duration you can shorten it by being one day. You can lengthen your company's financial year by up to 18 months once every five years. If [other conditions apply](https://www.gov.uk/change-your-companys-year-end#:~:text=You can change your company's,the one immediately before it.), such as if your company is in administration, you'll be able to lengthen your financial year more often.

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What are the deadlines for payment of PAYE taxes?

What are the deadlines for payment of PAYE taxes?

If you're paying salaries to employees or directors, you need to register for PAYE and pay your PAYE bill to HMRC.

  • Monthly payments: Your PAYE bill is due on the 22nd of the next tax month.
  • Quarterly payments: Your PAYE bill is due on the 22nd after the end of the quarter.

There are various ways to make your payment.

  • Same or next day payments: online or telephone banking, CHAPS
  • Payments processed in 3 working days: card payments (online), Bacs, cash or cheque payments at your bank or building society, Direct Debit, by cheque through the post
  • Payments processed in 5 working days: Direct Debit (if it's the first time you're setting up a Direct Debit payment)

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What are Company Deadlines?

What are Company Deadlines?

As a limited company director, there are several important deadlines you need to be aware of. These are:

  • File your Self Assessment tax return: 31st January 2022 for the 2020/2021 tax year
  • Pay you Self Assessment tax: 31st January
  • Registering for VAT: Register for VAT within 30 days of meeting the conditions for [compulsory registration](https://www.gov.uk/vat-registration/when-to-register#:~:text=Compulsory registration,over the last 12 months)
  • Filing and paying VAT returns: 1 month and 7 days after your VAT quarter end date
  • Company accounts: First year accounts are due 21 months after incorporation. Subsequent accounts are due 9 months after the year end
  • Corporation tax registration: You need to register within 3 months of trading commencing.
  • File your corporation tax return: 12 months following the end of your accounting period
  • Corporation tax payment: 9 months and 1 day following the end of your accounting period
  • File your Confirmation Statement: You need to file a confirmation statement every 12 months, within 14 days after your confirmation date.
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