By Cheaper Accountant, Nov 24 2017 07:19AM
We often receive questions from clients new and old about the difference between operating as a sole trader and operating via a limited company. In particular, we are often asked to provide guidance on what taxes apply to a sole trader and how much each client can expect to pay in tax. This blog article will help to define what a sole trader actually is and who would be considered a sole trader. The article will then provide guidance on what specific taxes apply to a sole trader as there are differences when compared to a director of a limited company, for example. It’s not the intent of this article to focus on limited company and company director taxes.
What is a Sole Trader?
A sole trader is probably the simplest company structure that you can operate within the UK and there are less filing and accounting administration requirements associated with operating as a sole trader when compared to other company structures, such as a limited company.
A sole trader effectively operates their business in their own identity and remains personally responsible for all business liabilities and is taxed personally on all business profits. An example of a sole trader could be a market stall trader. This is very different to a limited company, where the company itself is considered a separate legal identity and in turn the limited company itself is liable and responsible for all business liabilities.
As a sole trader all business profits are considered by yours whereas with a limited company the company profits belong to the company. A sole trader is free to access business profits at any time whereas a limited company may pay a salary and dividends to company directors and shareholders.
Sole Trader Taxes
A sole trader is taxed on all business profits (sales less allowable expenses) and this is transacted via the sole traders’ personal self-assessment tax return. A sole trader will complete the Self Employed sections of their self assessment tax return and this is correct definition of self employed. The business profits are taxed as income and income tax and national insurance applies to sole traders.
It is worth pointing out that a sole trader can withdraw cash from the business and this does not lead to any tax being due. This is because the cash already belongs to the sale trader with taxes paid on the overall business profit or loss.
Class 2 and class 4 National Insurance contributions apply to a sole trader. Class 2 NI is generally charged at £2.85 a week whereas class 4 NI’s are calculated as 9% of profits between £8,164 and £45,000 with a rate of 2% applying to profits from £45,000 upwards (this operates in a similar fashion to an income tax bracket).