Joanne Harris, Head of Technical, Compliance and Payroll at SJD Accountancy, is an expert in supporting self-employed people with their tax and business affairs. Here, she breaks down the details for Working Dads.
Choosing to go self-employed can mean more money, better hours, and a flexible work-life balance, all of which contribute to the reasons why so many people make the decision to work for themselves.
As of February 2022, there were around 4.23m self-employed people registered in the UK. This highlights an ongoing strong entrepreneurial spirit that has helped drive the UK economy forwards for many years.
When going self-employed, it’s important to consider the right company trading type for you, your family and the type of business you want to operate.
The way in which you register your business can impact your tax, take-home pay, legal responsibilities, and even personal finances, so it’s vital to look at all the options before you make your choice.
When it comes to making the decision, there are a few common things to check, and see if you relate to them as these may influence how you choose to establish yourself in the self-employed world.
Then setting up as a Sole Trader may be your preferred option. It is simple to set up – and close – when needed and doesn’t need a separate business bank account.
Essentially, if you register as a Sole Trader, you just need to keep records of your income and expenses for the period, and then file a Self-assessment tax return (SATR) annually, to calculate the income earned by you and the taxes due in the year. Once the SATR has been submitted to HMRC, you simply pay the tax liabilities at the required time.
Sole Traders will pay income tax on profit earned, irrelevant of whether you had drawn all the profit earned in the tax year, as well as pay Class 2 and Class 4 NI contributions. If you earn around the basic rate tax threshold (£50,270 per year for 2022/23) or below however, then operating as a Sole Trader may still be more tax efficient for you as there is no company tax to pay.
Then a Limited Company set up may be your preference. It offers more opportunities for growth, tax planning and can also offer more commercial credibility in the market, as many agencies, for example, will not work with Sole Traders.
For higher earners, even the double bite of tax from Corporation Tax at 19% (current rate) can still mean you are more tax efficient, as the ability to choose when to take monies creates more tax efficiencies.
However, this shouldn’t deter you as there is more scope to be compliantly tax efficient, and so Limited Companies generally provide a better return as your profit rises over the higher rate tax bracket.
A general rule of thumb when it comes to deciding whether to register as a Sole Trader or Limited Company, is to be led by the amount you expect to earn, as well as your own personal circumstances.
If you’ve made the decision between Sole Trader and Limited Company, you’re one step closer to getting your business off the ground, but make sure you’ve done further research first.
A business plan, funding options, and the ability to devote hours of work on top of your other commitments, will be key in making a success of your next venture.
Going self-employed can be tough at the beginning, but there are millions in the UK who have made the move and never looked back – and when you’ve made the right decision on your trading type, you’ll reap the rewards by avoiding tax complications further down the line.