Sole Trading is generally the easiest type of business available to someone starting out and from HMRC’s perspective the owner is the business and there is little distinction between the two.
This can be an advantage when it comes to withdrawing money from the business and it also reduces the amount of red tape that the business needs to adhere to, especially relating to taxation.
The drawback to this business type on the other hand is that often Sole Traders end up paying more tax than their counterparts operating within limited companies as they can’t take NIC free dividends.
They also have unlimited liability for any issues arising from their operation, this can result in risk to non-business assets like a family home if appropriate insurance hasn’t been taken.
Generally Sole Traders are liable for the following types of tax:
Income Tax @ 20%
Class 2 NIC’s @at £2.80
Class 4 NIC’s @ 9%
The actual payment for income tax and class 4 NIC’s is in 3 parts, taking the tax year Apr 6th 2015 – Apr 5th 2016 as an example.
31st Jan 2016 – Half of previous year’s tax bill
31st July 2016 – Half of previous year’s tax bill
31st Jan 2017 – The balancing amount to bring the total paid back to the tax return
A Sole trader’s tax bill is calculated from their accounts ending within the tax year, this means that they do not have to produce accounts between April and April, and can have a different year end if they wish, this would generally be done to maximise personal tax allowances.
However if the year end is different from the tax year then the sole trader may end up paying Overlap Tax, whereby they will essentially be taxed for the same time period twice.
As accountants we have helped various start-ups in and around Northampton pick the right business structure for them, if you would like to discuss any of the issues covered above please contact us.