Everything you should know before becoming a sole trader

Starting a freelance career marks a significant transition from traditional employment but it’s a decision that many are nervous to make.

Freelancing, while offering greater flexibility and autonomy, comes with its own set of challenges, decisions, and an increased responsibility for your finances.

The first decision you need to make is whether to become a sole trader or set up a limited company.

In the first part of this series, we will help you understand how becoming a sole trader could affect your tax obligations, legal liabilities, and administrative duties, to help inform your decision.

Keep an eye out for our next blog, which will explore the option of setting up a limited company if being a sole trader is not the right path for you.

Pros of becoming a sole trader:

  • Ease of setup: One of the most appealing aspects of being a sole trader is the straightforward setup process. You simply need to register with HM Revenue & Customs (HMRC), and you can start trading almost immediately.
  • Autonomy: As a sole trader, you have complete control over your business decisions. This autonomy means you can directly manage your finances, choose your work, and make decisions that best suit your personal and professional goals.
  • Simplified finances: The financial management and tax reporting requirements for sole traders are relatively straightforward. You are required to keep records of your income and expenses and complete an annual Self-Assessment tax return.

Cons of becoming a sole trader:

  • Unlimited liability: The major downside of being a sole trader is the unlimited liability. If your business encounters financial trouble, your personal assets, such as your home or car, could be at risk. This risk is something to seriously consider, especially if your freelance work involves significant financial transactions or liabilities.
  • Tax efficiency: As your income as a sole trader grows, you may find yourself moving into a higher tax bracket. This situation can lead to a higher tax liability for you as an individual.

Tax considerations

Navigating taxation effectively is a critical aspect of freelancing.

As a sole trader, you’ll complete a Self-Assessment tax return annually, paying Income Tax and National Insurance on your profits.

If your profits exceed £85,000 you will need to register for VAT.

You can register for VAT before the threshold to reclaim VAT for business expenses.

Keeping records and accounting

As a freelancer, you must track all business transactions and commit to firm and robust accounting practices.

Often, it is advisable to consult with an accountant to ensure that your business finances are in order.

Keep an eye out for our next blog, which will explore the option of setting up a limited company if being a sole trader is not the right path for you.

If you would like to speak to one of our experts regarding becoming a sole trader, please get in touch today.

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