Self-employment offers individuals the opportunity to run their own businesses, with sole traders being the simplest form. Sole traders are self-employed individuals who are the only owners of their businesses. Within three months of starting, they must notify HMRC for self-assessment purposes.
It is essential to distinguish between self-employed individuals and company directors, as many directors are considered employees of their companies. While being a sole trader is easier in terms of registration and administration, it does pose risks; personal assets can be at risk if the business incurs debts.
When earnings exceed £100,000, it may be advantageous for sole traders to consider registering as limited companies due to changes in personal tax allowances. For example, personal allowances decrease as income rises, with a complete reduction at £125,140. On the other hand, limited companies are subject to a corporation tax rate of 25%.
Sole traders must maintain proper records, but they are not legally required to follow strict accounting formats. Employing an accountant, although optional, can provide beneficial support, especially for tax interactions.
In terms of tax contributions, sole traders are no longer required to make Class 2 national insurance contributions but must pay Class 4 contributions based on profits.
The UK has seen significant growth in the number of private sector businesses, with a notable portion being sole proprietorships. As of 2023, there are approximately 5.6 million private sector businesses, with a significant number lacking employees.
Why this story matters: The rise in self-employment reflects changing work trends and economic independence.
Key takeaway: Sole traders enjoy flexibility, but personal exposure to business debts is a key risk.
Opposing viewpoint: Some argue that the benefits of being a limited company, primarily in tax efficiency, outweigh the simplicity of being a sole trader.
