Sole Traders and Tax

Sole Traders and Tax

If you start your own business you are obliged to follow certain rules and regulations for sole traders and tax as specified by HMRC. Within three months of starting your business you must register and notify the HMRC that you are trading. The Self Employed are subject to exactly the same rules when it comes to tax and national insurance that employees are working under Pay As You Earn (PAYE).

Sole Traders and Tax

Each year sole traders must complete a self assessment tax return using the government’s online portal or your accountant can complete this on your behalf once they have the necessary figures. When you complete this form, it will automatically calculate how much tax you owe and when this must be paid. Usually you will have to make two payments; the first in January and then a second payment on account in July.

Employed or Self-Employed

Although in the UK there is no definitive laws which govern what makes someone employed or self employed, but a number of rules exist to help you identify your employment status. If you work for an organisation but you use your own resources and appoint staff through your own expense, in all likelihood you will be self employed. If you don’t use your own equipment or resources or appoint contractors, but you receive certain benefits and wages from the business then you are considered an employee.

A sole trader is someone who operates their business as a sole owner. If you work as a sole trader you can either work independently or you can recruit others on a freelance or paid basis to work for you depending on the scope of your business and demands.

When your business is structured as a sole trader, you will keep all of the proceeds of what you earn as a business but it also assigns you what is known as unlimited liability. This means that any debts that your business accrues, you will be personally accountable for these.

Establishing your business as a sole trader is much easier than setting up a limited company.

When it comes to managing your business and finances, there are certain obligations that you have.

Record Keeping

Managing your own business means that you need to have effective procedures in place for recording your income and expenditure. These records must be sufficient to satisfy the HMRC that you have met their requirements. The nature of these records will depend on what type of business that you run. A retail business for example will have to keep more detailed records than a sole trader working from a home office as a designer.


When you start your own business you will have to comply with the various government regulations. The most relevant regulations in relation to sole traders include VAT, PAYE and National Insurance.

Value Added Tax (VAT) is not applicable to every sole trader.

You are personally accountable for registering your company for VAT if your business meets any of the following criteria:

  • At the end of any month in the tax year, the total value of taxable money that you have earned at any time in the last 12 months which is higher than the current VAT threshold
  • You have sufficient grounds to believe that your taxable income will be higher than the current VAT threshold in the next 30 days
  • Currently the VAT threshold is £64,000.

If you take over a business that someone else has owned, you must still ensure that you comply with the relevant regulations. When this happens, the date of registration for VAT will be the date when you assumed ownership of the company. If your business is below the VAT threshold you can register voluntarily for VAT and this brings with it a number of distinct advantages.
Registering for VAT requires the completion of form VAT 1 which must be sent to Customs and Excise within 30 days of meeting any of the above registration criteria.

PAYE Regulations,

As your business grows, you may appoint employees to work with you under PAYE. If you decide to do this and you pay your staff wages through payroll, you must ensure that your business complies with the relevant regulations.

Pay As You Earn (PAYE) is operated by the Inland Revenue to collect income tax from employees each month. This system is also used for Directors pay. A business owner will have to put in place suitable processes to manage payroll. Many companies will outsource this to a specialist payroll provider or an accountant can process it for you. As an employer you will need to deduct the relevant amount of income tax and national insurance contributions from the wages of your employees each month and send these to the Inland Revenue.

About the author:

This article was written by a member of the Expert Answers legal advice team and posted by Expert Answers admin. Expert Answers provides online legal advice on all aspects of UK Law to users in the United Kingdom.

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