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

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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self employed tax guide

Self employed tax obligations guide

Self employed tax obligations guide

When you're self-employed, you have unique financial obligations-especially when it comes to paying your taxes.

When you work for a larger corporation, or even a relatively small business, your company takes on a large percentage of handling your tax responsibilities for you.

As a freelancer or small business owner, you're on your own. You work as an independent contractor for each of the clients you work for-and they don't take taxes out of your check before they send it to you.

How then should you handle the responsibility of paying your taxes?

This guide will help you get started:

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how to register as self employed guide

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 sole trader guide

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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7 Sole Trader Advantages

7 Advantages of Being a Sole Trader

7 Advantages of Being a Sole Trader

7 Advantages of Being a Sole Trader

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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.

type of business guide

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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disadvantages limited company guide

5 disadvantages of a limited company

5 disadvantages 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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advantages limited company guide

5 advantages of a limited company

5 advantages of a limited company

The advantages of operating as a limited company are well known. It can be a great way to maximise your take-home pay, improve your credibility with customers and limit your personal liability. Like most things in life, it's a case of what's best for your situation. While the positives outweigh the negatives for most people, there are a few things you should know before you make the jump to a limited company.

In this article, we'll outline the disadvantages of operating as a private limited company. Bear in mind that there are many advantages to a limited company and in many cases, these advantages will outweigh the disadvantages, so don't think of this as a report of doom and gloom.

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How do I register a limited company?

How do I register a limited company?

There are a couple of ways to go about registering a limited company:

  • Register directly through Companies House
  • Go through a third party: An accountant or company formation service can help you process your application, significantly lessening your admin burden. Beyond the application, a good third-party service can also provide accounting advice, help you fulfil your filing obligations and assist with other admin tasks.

We've included further details in our guide on setting up a limited company.

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How do I register my business?

How do I register my business?

To register a business as a sole trader, you need to:

Once you've registered, you need to fulfil your responsibilities as a sole trader. These include:

  • Keeping records of your sales and expenses
  • Submitting a Self Assessment tax return each year
  • Paying income tax and National Insurance Contributions

To set up a limited company, you need to:

  • Decide what type of limited company you need
  • Choose a business name
  • Choose how to set up your limited company
  • Complete the company formation process
  • Open a business bank account
  • Inform your stakeholders
  • Get your VAT registration or transfer sorted out
  • Set up your payroll
  • Update your company details
  • Get your books sorted out

To set up a business partnership, you need to:

  • Choose a business name
  • Choose a ‚Äònominated partner'
  • Register with HMRC
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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 returns deadline guide

Company Filing & Deadlines: Self Assessment, VAT, Accounts, Tax & more

Company Filing & Deadlines: Self Assessment, VAT, Accounts, Tax & more

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deadline for tax return guide

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 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 the late filing and payment penalties?

What are the late filing and payment penalties?

PAYE

RTI late filing will incur a monthly penalty of £100, depending on the number of employees you have.

Self Assessment

A late filing penalty of £100 is imposed if your tax return is up to three months late. The penalty increases if you're later than three months, or if you pay your tax bill late. Additionally, interest will be charged on late payments.

VAT

You may be required to pay a surcharge if you submit a late return. Surcharges for late payments or VAT return filings are indicated on the HMRC website.

Corporation Tax

HMRC's penalties are as follows:

  • 1 day late: £100
  • 3 months late: An additional £100
  • 6 months late: Your total corporation tax bill will be estimated, after which a penalty of 10% of unpaid tax will be imposed.
  • 12 months late: An additional penalty of 10% of unpaid tax will be imposed.

Company accounts

The following penalties for private limited companies will be imposed if you fail to file your accounts with Companies House on time:

  • Up to 1 month late: £150
  • 1 - 3 months late: £375
  • 3 - 6 months late: £750
  • More than 6 months late: £1,500


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What is your First Accounting Year End Date?

What is your First Accounting Year End Date?

The first accounting year end date for a new company is the last day of the month in which the first anniversary falls on. For example, if your company was incorporated on 15 January 2021, the first accounting year end date will be 31 January 2022.

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Self Employed Registration Guide

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Self Employed Registration Guide guide

Contractor & Freelancer Insurance Guide

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Contractor & Freelancer Insurance Guide guide

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