10 Tips for Sole Traders

Here are some top tips to keep your business running smoothly with our sole trader insurance.

 

1. Setting up as a sole trader

Setting up as a sole trader is a pretty straightforward process. You can really get up and running quite quickly. As soon as you become self-employed, it’s important to tell HMRC.  You need to register with them by 5 October after the end of the tax year that you became self-employed. For example, if you started your business in June 2022, you would need to register with HMRC by 5 October 2023.

When you’re self-employed, you pay income tax on your trading profits – not your total income. To work out your trading profits, simply deduct your allowable business expenses from your total income. This is the amount you’ll pay Income Tax on.  And the sooner you actually start doing business, the sooner you can earn some money, as any profit is yours.

2. Keep a diary

As it is you, and solely you, running your business, there are numerous day-to-day tasks that can make some huge demands on your time. Making sure you manage your time will be crucial to ensure you can efficiently tackle every necessary task. Learn to plan your time wisely by using a time management diary; break your day down hour by hour. When you are self-employed, time is money.

3. Pay taxes on time

As a sole trader, you are legally responsible for completing your tax returns every year through a self-assessment tax return as well as registering for VAT if your turnover exceeds the VAT threshold of £85,000. Remember, you must keep records of your business income and expenses. It’s a good idea to contact an accountant to get advice so you are fully aware of your responsibilities particularly regarding tax and submitting self- assessment tax returns.

4. Invoice immediately

As soon as you have completed the work you were hired for, send your invoice out immediately. There are many online bookkeeping systems that are MTD compliant and can send emails directly (gone are the days when the invoice gets 'lost in the post'). Make sure your invoice has all the relevant information such as total cost, payment terms and bank account details for the payment to be made to.

By using accounting software, you can also keep track of everything. This audit trail is useful as it allows you to have records of everything that was done and by whom.

Dealing with late payments is part of being a sole trader. Inevitably not all clients will pay on time, so it’s important to follow up immediately and chase frequently after that. You don’t want to have to rely on clients always being on time with their invoices.

5. Set up a business bank account

As a sole trader, just because all the money you earn is yours, it doesn't mean you should spend every penny of it. Remember you are still a business. You should set up a separate bank account to get your business earnings paid into and pay out any business expenses. You can then transfer your drawings or wages into your own personal account. That will help you to manage your money more effectively, and ensure you aren't tempted to spend it all.

6. Save, save, save

As a sole trader it's your responsibility to raise any money needed for your business, from your own assets or from loans. With most small businesses struggling to even secure a loan it makes more sense to save the money you do make - in case you need to invest it in new equipment, reinvest it into your business or to pay your tax bill.

7. Can sole traders have employees?

Contrary to popular belief, yes, you can actually employ people as a sole trader business. If you expand and decide to hire additional staff and delegate, you can register with HM Revenue & Customs (HMRC) and set up a PAYE scheme. You can then pay employees, deduct income tax and national insurance contributions from your employees, submit regular RTI returns to HMRC and pay the monthly relevant tax and NI due.

Under the Pensions Act 2008, every employer in the UK must put certain staff into a workplace pension and pay into it. This is known as auto-enrolment.

8. Get sole trader insurance

Getting a good insurance policy for your sole trader business should be a top priority both for legal reasons and for peace of mind. Protecting yourself against the risks you can face as a business owner. Depending on your business needs you may need public liability insurance to cover injury or accident claims, as well as claims for damaged property; typically, this type of cover can vary between £1 million and £10 million. Professional indemnity insurance is key if you offer advice or any kind of professional services. And if you employ staff you are required by law to have employers' liability insurance.

9. Consider incorporation

Remember just because you start your business as a sole trader doesn't mean you have to trade as one for the rest of your life, you can change your business' legal status, as your circumstances change. In some cases, incorporation can reduce the amount of income tax you pay on your business profits as well as make you a separate legal entity from that of your business. And hence reduce your personal liability. Your business is unlikely to stay the same size so as your situation changes, if you want to opt for a higher exposure to risk, for instance, but don’t want to put your personal assets in jeopardy, incorporating your business can be a great solution.

When you become a limited company, you can still use your same business name if it hasn’t already been registered with Companies House – all you will need to do is add Ltd. Speak to a business adviser or accountant to find out the implications for your business.

Starting out as a sole trader has a lot of advantages that someone new to self-employment can certainly enjoy, you don’t have to retain this status forever; in fact, you can become a limited company down the line if you prefer.

10. Develop your skills and market your business

You have so many aspects to juggle when you run your own business but it’s crucial that you develop your professional and personal skills. It is a good idea to set time aside to take courses and attend conferences and events. This can help you stay up to date with market changes and demands and find new clients by possessing a varied set of skills.

Marketing your business is key to growth. Even small businesses should develop a brand identity that relates to your values and the way you want to position your business to your target audience. The name and logo, the font you choose and your website all play a role on branding your business.

In this digital age, your website can be viewed as being your greatest promotional tool. Your company website will communicate to the world all your business capabilities, besides if you aren't on the internet nowadays you virtually do not exist.

About the author

Alison Wild BCom (Hons), FMAAT, MATT, Taxation Technician is a highly respected industry professional who has been working with and advising SMEs in areas including tax, pensions, insurance and marketing for over 25 years. She is a member of the Association of Accounting Technicians (AAT) and Association of Tax Technicians (ATT) and also has over 20 years' experience as a residential landlord.