Should I Start A Business Being A Self Employed Sole Trader?

Thinking of starting a business or trade?  Where do you start?

Do you know the differences between Self Employed Sole Traders, Partnerships and Limited Companies?  We will tackle all 3 options but let’s look at how you set up as a self employed sole trader.

Points to Note As A Self-Employed Sole Trader

• The business is you personally  – Dave Smith Trading As “Uptown Carpet Fitters”.
• Income is your personal income (there is no separate legal entity such as a Limited Company).
• Expenses are in your personal name.
• All profits are in your personal name and your income is taxed personally as self employed sole trader income.
• This means Self Employed National Insurance Contributions and Self Assessment Income Taxes with income tax rate tiers at 20%, 40% and 45%.
• All debts are in your personal name too meaning you are fully liable for them and your other personal assets e.g., private (non-business) money, investments, your home, your car are not protected from creditors.
• Your pension fund is protected from creditors unless you have drawn from it such a tax free cash, flexible drawdown or an annuity.

Setting Up As A Self-Employed Sole Trader

• If your self-employed turnover (income) not profit is below £1,000 pa, there is no need register with HMRC for self assessment
• If your self-employed turnover (income) not profit is above £1,000 pa, you need to register with HMRC for self assessment.
• Your profit (income less allowable expenses) is subject to income tax at 20%, 40% and 45% depending upon how much your profit is.
• Self-Employed National Insurance Contributions (NIC) are not an allowable business expense as you pay them personally to protect your state pension entitlement.
• Profits below £6,725 pa = There is no requirement to pay NIC, but you can pay Voluntary Class 2 NIC at £3.45 per week to get credits towards your state pension.
• Profits between £6,725 pa and £12,270 pa = There is no requirement to pay NIC, but you still get credits towards your state pension without having to pay you Voluntary Class 2 NIC of £3.45 per week.
• Profits over £12,270 = You pay Class 4 National Insurance Contributions, and you get credits towards your state pension.  Profits £12,570 - £50,270 = 6% NIC, Profits over £50,270 = 2% NIC.
• When making your self assessment returns, you pay your income taxes and well as any Class 2 or Class 4 NICs.
• Self Assessment Deadline for each tax year 6^th April to 5^th April is due by the following 31^st January after the tax year end.
• By 31^st January you pay you end of tax year balancing payment for the previous tax year plus …
• Your 1^st ‘Payment on Account for Tax’ for the next Tax Year (based upon 50% of the previous year’s tax liability).
• Your 2^nd Payment of Account for Tax’ for the next Tax Year is payable by 31^st July (again based upon 50% of the previous year’s tax liability).
• Your final Balancing Payment based upon taxes due on the next year’s profits less your two Payments on Account is due by the following 31^st January.

Pros and Cons of Self Employment

• Easy to set up and easy to run but you are personally liable, so your home and private wealth is at risk.  
• In addition, Making Tax Digital (MTD) for Income Tax and Self Assessment (ITSA) for the Self-Employed and Landlords is due to start in April 2026 where profits are over £50,000 pa and from April 2027 where profits are over £30,000 pa.  This means that tax quarterly returns will be required in the same way that limited companies have to do quarterly returns.

See: Should I Go Traditional Partnership?  Should I Go Limited Partnership?  Should I Go Ltd Company? and S/E v Ltd Co.  Take Home Pay

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