Make sure you are tax efficient if you are a Self-Employed Sole Trader 

Accountants for Self Employed Sole Traders

Make sure you are tax efficient if you are a Self-Employed Sole Trader 

What is a sole trader? 

If you run a business on your own as an individual and you have not incorporated your business then you are self-employed. This is also known as being a sole trader. 
Being a sole trader means that you can keep all the profits that your business makes after you have paid tax on them. It also means that you are personally responsible for any losses that you make. 
You should be aware that there are various rules involved in running and naming your own business and if you are unsure about what is involved then it may be worth engaging with an accountant that is an expert in the area. 

When do I have to register with HMRC? 

HMRC require you to be set up as a sole trader if any of the following apply: 
You earned more than £1,000 from self-employment in a tax year. 
You need to prove that you’re self-employed, for example to claim Tax-Free Childcare. 
You want to make voluntary Class 2 National Insurance payments to help you qualify for benefits. 

How do you set yourself up as a sole trader? 

It is very simple to set up as a sole trader. All you need to do is to contact HMRC and inform them that you need to pay tax through the Self-Assessment regime. You will then be required to complete a Self-Assessment Return each year. 
Take care to use the appropriate date for your registration, otherwise you may not be able to declare your self employment income correctly.  
You can also be fined for late registration. 

Sole Trade or Limited company? 

Operating is a sole trader is generally a simple way of operating a business and is suitable for many small businesses. 
However, as businesses grow, it is often a lot less tax efficient than operating through a limited company and it also does not offer the protection of limited liability that a company offers. You should regularly consider whether moving your business to a limited company structure may be better for you. 
Sherwin Currid Accountancy understand all aspects of self employment accounting and tax. We can also speak with HMRC on your behalf. Please get in touch if you would like to find out more about how we can help support you. 

Keeping records, filing returns and paying tax as a Sole Trader 

If you operate as a Sole Trader, you are required to keep business records for your business. These records should include details of all income and expenditure of your business. 
Nowadays, it is common to use cloud based accounting software to keep records. Software such as FreeAgent and Xero can used by sole traders, making it easier to keep accurate, up-to-date records. They also enable you to see real time how your business is performing and they allow you to easily prepare the information required for your tax returns. 
As a sole trader, you are required to complete and submit a Self Assessment (SATR) Tax return each year. If you are unsure about this process then it is advisable to seek out professional help from an accountant. 
A sole trader must pay income tax on profits made as well as Class 2 and Class 4 National Insurance. 

What happens if I don't file correctly by the tax return deadline? 

Ensuring that you meet all of your filing requirements of a your sole trade on a timely basis and that these returns are accurate and fully compliant will ensure that you are not charged penalties and fines for late in inaccurate returns. 
The penalty regime operated by HMRC can mount up very quickly and significantly erode any profits that you make. 

VAT and sole traders 

The rules around VAT apply to Sole Traders in the same way that they do for Limited Companies. This means that you must register for VAT if your turnover exceeds £85,000. 
You can register for VAT voluntarily if your turnover is below £85,000. This may be beneficial to you for a variety of reasons. If you are unsure, it would be advisable to discuss with an accountant whether voluntary registration for VAT may be beneficial. 

Sole traders in the construction industry and CIS 

If you are a sole trader and you are working in the construction industry as a subcontractor or a contractor then you will need to register with HMRC for the Construction Industry Scheme (CIS) and then comply with all the requirements of the scheme. 

Making Tax Digital for Sole Traders 

Making Tax Digital for Income Self-Assessment (MTD) is new legislation that will be rolled out from April 2026 for sole traders. 
From April 2026 sole traders with income over £50k will be mandated to use the scheme and from April 2027 sole traders with income over £30k will be mandated to use the scheme. 
Whilst the final requirements of MTD are still uncertain it is known that all qualifying sole trades will be required by law to keep digital records of all income and expenses using MTD qualifying software. 
Rather than an annual tax return under Making Tax Digital sole traders will need to make quarterly (and potentially more frequent) returns using qualifying software via the Government Gateway. There will also be an end of year declaration that is required. 
Making Tax Digital will require significant changes to how businesses report information to HMRC and it is important that businesses start preparing for these changes now. 

Reducing your tax bill when you are Self Employed 

There are many ways in which a sole trader can look to minimise the tax they pay and therefore to operate in a tax efficient way. Some examples of things that Sole Traders should consider when looking to operate tax efficiently include: 

Claiming allowable expenses 

There are detailed rules around what costs can be claimed as allowable costs. Ensuring that you claim all the costs that you are allowed to and that you do not claim for costs that you are not allowed to claim will enable you to minimise your tax liability but avoid any penalties and fines for submitting and inaccurate return. 

Consider using the VAT Flat Rate Scheme 

The flat rate scheme for VAT is an HMRC scheme that is available to many sole trades which can help some save money on their taxes. For example the flat rate scheme gives a 1% reduction is the first year which can be helpful for those starting out. It can also reduce the admin burden. 
The flat rate scheme is not beneficial for all however and it would be worth discussing the merits of using the scheme with a professional advisor before taking any decision. 

Work outside of IR35 

The rules on disguised remuneration known as IR35 are complicated. However it is always more tax efficient to operate outside of the legislation. Whilst this is not always possible there is much confusion and uncertainty around this legislation and if you are being told that you are caught by the legislation then it is always worth seeking an independent second opinion from an expert. 
Sherwin Currid are experts in IR35 and can give you professional advice on IR35 and how it impacts you. 

Make pension contributions 

This can be a very tax efficient option for sole traders because pension payments can be made out of your gross income, therefore reducing the amount of income which is subject to tax. 

Donations to charity 

If it is an option for you then you may want to consider making donations to charity. Donations to recognised charities are made from your gross income and therefore reduce your overall income that is subject to tax. 
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