How to be a successful sole trader

Working as a sole trader is a really simple way to operate. It means you’re self-employed so you’re your own boss, in control of your work, schedule and earning power. You can get started immediately as there’s very little paperwork and administration. As soon as you start earning, you simply register with HMRC under your own name or a name you choose for your business.

Before you take the leap into sole tradership, however, there are a few considerations you need to take into account.

• Liability – as a sole trader you are fully liable for any costs you incur. If you buy products and fail to pay for them your personal assets can be at risk if suppliers seek to recoup what they’re owed. This isn’t the case if you set up a limited company.
• Credit – it can be harder to get financing and/or credit because the business is solely reliant on you for income.
• Workload – working on your own leads to a heavy workload, so getting a good life balance can be a challenge
• Finding work – you’re responsible for finding work and will need to do this in your own time when you’re not working for your clients.

You can register as a sole trader with HMRC online or a specialist contractor accountancy provider like Workwell can do it for you. 

Sole trader registration covers you for National Insurance – Class 2 NI is no longer payable as of the 2024/25 tax year whilst Class 4 NI is payable when your profits exceed £12,570 (the current personal tax allowance).

You’ll need to submit a self-assessment tax return by 31st January each year. The tax year runs from 6th April to 5th April each year. So, if you plan to start operating as a sole trader in June this year, you will not have to complete a tax return until January 31st 2026 and the return would relate to your earnings from June 2024 to April 6th 2025.

You only need to register for VAT if your income exceeds £85,000 (2023/24) or £90,000 (2024/25) within any 12-month period. VAT returns must be submitted to HMRC on a quarterly basis. 

The Flat Rate Scheme, which allows you to keep some of the VAT you’ve collected, is applicable to sole traders operating in specific sectors. The percentage you can keep depends on the sector but is usually in the region of 3.5%. 

If you are VAT registered under Flat Rate Scheme and your income will exceed £150k in 12 months, you have to register for the standard rate scheme. If you are not VAT registered and your income exceeds £250k then you must register onto the standard rate scheme.

Tax is calculated according to the following tax bands:

You also need to be aware of the deadlines regarding tax payments.

You must submit a self-assessment tax return each year for the previous tax year. Paper submissions must be made by 31st October while online submissions and payment must be made by January 31st.

If your tax liability exceeds £1,000, you must pay tax in advance, known as Payments on Account (POA). With POA, half of your anticipated tax will be due by January with the second half due by July. These payments are deducted from your next Self-Assessment Tax Return but POA will be due again for the next period if your tax bill again exceeds £1,000.

Calculating National Insurance

Class 4 NI for the 2024/25 financial year is 6% on profits between £12,570 and £50,270 and 2% on profits above £50,270.

To qualify for the full state pension you’ll need to have made NI contributions for 35 years. If you have gaps in your NI payment record from previous years you can make up the shortfall by paying voluntary contributions as Class 3 NI.  It’s always best to check with HMRC to be sure that you know how much you need to pay to be entitled to your full state pension.

Costs associated with operating as a sole trader can be deducted from your profits which reduces the amount of tax you have to pay. 

To operate compliantly, expenses must be ‘wholly, necessary and exclusively for business use’. Items that are likely to be classified as allowable expenses include costs for office equipment and stationery, travel such as mileage (HMRC approved mileage rates) and rail, staff such as subcontractors, uniform (health & safety/branded – no dual purpose allowed).

If you work from home you can claim a homeworking allowance. To qualify, you must work a minimum of 25 hours a month at home.

Alternatively, you can claim a portion of your household bills for one room of your home where you work. Bills can include rent, mortgage interest, council tax. To work out what you can claim, add up your bills and divide by the number of rooms in your house. 

For example, let’s say you have a household bill for £50 per month and there are 5 rooms in the house - you can claim £10. For expenses which relate to both business and personal use, you will need to decide on the percentage of business use and claim only that value.

If you wish to buy a vehicle through your business you will need to do some careful calculations to see if it’s tax-efficient and cost-effective. At the moment there is favourable tax treatment of zero emission cars which are purchased for business use only. The following rules apply:

Zero emission vehicles

First year allowance – the full purchase price can be claimed as a capital allowance through your business. This can be a tax-efficient way to buy a new car.

CO2 emissions under 50g/km

Main rate allowances apply – 18% tax relief of the purchase price.

CO2 emissions over 50g/km

Special rate pool – 6% tax relief of purchase price

A vehicle which you’ll use for business and personal use is subject to tax relief on the business use percentage only.

If you’d like to make contributions into a Self Invested Pension (SIP) you can do so via your company. In the current financial year (2023/24) you can pay up to £60,000 into your personal pension and receive tax relief. 

If you’re a basic rate tax payer, pension contributions are paid from the earnings you’re left with after tax has been deducted. The pension provider grosses up the net contribution, adding back the tax you paid.

If you’re a higher/additional rate tax payer, relief is calculated in your self-assessment by extending the relevant banding.

It’s worth noting that you can backdate payments up to three years prior if you’ve been a member of a pension scheme but not paid in more than £60,000 in each of the previous tax years.

Get into the habit of organising your business income and expenditure on a weekly basis. 

Ensure you keep receipts relating to any business expenses as well as bank statements (ideally from a bank account which is separate from your personal account), sales invoices and payslips or remittances. You must keep these records for a minimum of 6 years.

Working as a sole trader is a great way to take the plunge into self-employment but it’s not without its complexities.  Whilst you focus on looking after your clients and finding work, let Workwell take care of your accounts, tax and National Insurance. 

Find out more about Workwell’s Essential Sole Trader package or get in touch with our expert team for tailored advice and support.

Kina Soodin is a specialist in contractor and small business accountancy at Workwell. Kina is passionate about helping self-employed people to navigate the complexity of tax and accountancy.

Together with her team, Kina is here to help new contractors feel confident in making the step into self-employment; and experienced contractors to get the most out of working for themselves.