Self Employed (aka Sole Trader)
This is the structure where you as an individual are the business and it is reported on your personal tax return.
What is it?
Anybody can set up in business as a sole trader. There is no need to set up a separate company, the main requirement is to let HMRC know there is an income that needs to be declared and have tax paid on the profits.
You can still take on staff and run a payroll but you as the owner wont be on payroll, you take drawings out of the remaining profits after tax.
You will be taxed as self employed through your personal tax return, which means you will need to pay Class 4 National Insurance on profits over the current threshold. (Class 2 NI is no longer required as of 2024, this may change!)
What You Need to Do
The number one thing we recommend is to have a separate bank account for your business, that means a separate bank account for each business if you have more than one. This keeps the transactions easy to find for any report to HMRC and simplifies finding the information to complete the boxes in the tax return when that comes around each year.
The other important aspect is to register for self assessment with HMRC as soon as possible and make yourself aware of payments on account so you can budget for your tax payments.
Payments on Account start once you have reported tax in a year where that tax bill exceeds the current thresholds (at time of writing £1,000) and there is not enough PAYE income to collect the tax through your tax code (you don't have a significant payroll income elsewhere).
Example:
Where the tax bill for a year meets the requirements, let's say the tax bill for 2022-23 came to £5,000, then when you pay your bill (by the latest) end of January 2024, then you will be required to make payments on account for 2023-24 of 50% based on 2022-23 - so as well as the £5,000 for 2022-23, you will also pay £2,500 for 2023-24.
The second instalment will be due in July 2024. This then offsets the balance due for 2023-24 payable by January 2025 and so on....
The first year this hits seems always to be a painful surprise, so make sure you have planned for it and put aside 20% of your turnover as you go through the year to prepare for your tax bill.
Other things to keep in mind; if you take on staff you will still need to prepare a registered payroll for the wages and if you tip over the VAT threshold you will still need to register for VAT. Trademarks and other Intellectual Property protections will still apply to you and can impact the name you choose to trade as, so if the name of the business is key for you, make sure it is protected and not already in use.
MTDITSA - Making Tax Digital for Income Tax Coming from April 2026
There is a new requirement from HMRC for Sole Traders to file quarterly submissions to HMRC on the business profits, so you will need to use a finance software to facilitate this.
MTD is being phased in over a few years, starting with those on £50k turnover first, from April 2026, the following year it will be £30k turnover and then down to £20k. The quarters will be the same for all businesses and there will be a tight turnaround of a month aftter the quarter end to make the submission, so getting into good regular habits with your bookkeeping from the start is more and more important.