Find out how you can pay yourself as a sole trader, including allowable expenses, whether you need a separate business bank account, and how much tax and National Insurance you will pay.
Great, you’ve decided to work for yourself. It’s a very rewarding career path for over 5 million people in the UK. We’ve put below some of the things you need to do and may want to consider as you’re starting on this journey.
If you are widely referred to as a freelancer, it’s likely you are a sole trader. It means that you can keep all your business’s profits after tax, but also that you are responsible for the debt or financial responsibilities of your company.
How to set up as a sole trader
You will need to tell HMRC that you are a sole trader so that you can be taxed correctly. You will pay your yearly tax return through HMRC’s Self Assessment.
Find out more here.
When do I need to set up as a sole trader?
According to GOV.UK, you need to set up as a sole trader if any of the following apply:
- You earned more than £1,000 from self-employment between 6 April two years ago and 5 April last year
- You need to prove 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
Find out more here.
Further support with setting up as a sole trader
IPSE is running an incubator programme to support those who are new to self-employment. This 12-month programme covers everything from setting up, networking, and mental health as a freelancer. For more information, contact one of the membership team.
There is a ‘Set up as a sole trader’ step-by-step plan on GOV.UK, which you can do here.
A limited company is a company ‘limited by shares’ or ‘limited by guarantee’. ‘Limited by shares’ means the company is legally separate from those who run it, has separate finances, and has shares and shareholders. It can keep any profits it makes after tax.
In comparison, ‘limited by guarantee’ companies are not for profit usually, so they invest their profits back into the company. It is still legally separate to the people who run it and has separate finances.
Limited company owners are particularly impacted by the implementation of IR35. Check out the IR35 advice section for up-to-date information or use our tax and legal helplines to find out more.
This advice has been provided by Integro Accounting.
If you're an existing sole trader or researching the start of your freelance career, then you might be wondering how to set up a limited company. It costs less to register than you might assume, but it's still important to understand the benefits and downsides.
Becoming a limited company can save you money and limit the financial risk from starting a business. And it also gives you a more professional and protected identity, especially if you plan on expanding in the future.
We provide an overview on getting started as a limited company and how forming on a certain date will not save you money in tax!
When is it recommended to set up a limited company?
A limited company can suit any business type and is very straight forward to set up.
The general rule of thumb is that if you are expecting your annual turnover to exceed £25,000 then a limited company will be more tax efficient for you. You may be just starting up and asking yourself “how do I know if I will reach this limit?”, of course, this is only a recommendation and not a necessity. Should you wish to form a limited company under that threshold there are still many benefits in doing so. More on this later.
There are several ways you can register your limited company. You can do so by directly going to company’s house or through an accountancy firm who can complete all other necessary related tasks for you too, such as VAT registration, setting up a business bank account etc. Let’s start with the pros...
What are the benefits of a limited company?
Most commonly when freelancing, many choose to work as a sole trader/self-employed or as a limited company.
As a sole trader, it can be quick and easy to set up, there are low start-up costs involved and less admin to that of a limited company. As a sole trader you are essentially the company. Sadly, the disadvantage also being that you are the sole owner! You have unlimited liability for any issues or debt incurred with the business. In other words, you, personally, are fully liable.
As a limited company you are treated as an employee of the business and therefore, separate to that of the company. This is one of the main reasons over 500,00 limited companies are incorporated each year (according to companies house). The other benefits include:
Now let’s look at the things some people perceive as less advantageous when setting up a limited company:
Is there a right time of year to set up a company?
Whenever you set up a limited company, your accounting year runs over a twelve-month period. The year end is at the end of the month in which the anniversary of when the company was set up falls. The company can therefore be set up at any time during the year, there is no specific month throughout the year that will save you money.
Even though you can set up anytime throughout the year, it is always best to speak to an accountant to help with successful tax planning.
How can I set up a limited company?
Chat to your accountant in order to determine if you should be a limited company. There are a number of steps you will have to take in order to set up, but GOV.UK has a handy step-by-step guide to help you.
These steps include:
- Choosing a name - You can see what names are available on the companies house name checker
- Choosing directors and a company secretary
- Deciding who the shareholders or guarantors are and how many shares they will each have
- Identifying people with significant control over your company
- Preparing documents agreeing how to run your company
- Keeping records
- Registering your company
Once your company is formed, you will then receive several documents. You will receive a certificate of incorporation along with Memorandum of Association, Forms 10 and 12 and Articles of Association. These are simply to be kept on behalf of your company should you ever need them.
Of course, once your company is formed, there will still be a number of questions you may have. Some of the more frequently asked questions we get asked include:
In Integro Accounting’s latest survey, over 75% of our clients claimed that better work life/balance and flexibility was the number reason they remained contracting. There are so many advantages to being an independent professional and of course there are benefits and disadvantages to setting up as a limited company versus as a sole trader but hopefully this article has pointed you in the right direction. And remember, setting up a limited company doesn’t need to be complicated. Work with the right accountants, keep on top of your admin and dedicate the time to it that it requires. Simple!
For any further advice on being a sole trader, using an umbrella company or going limited, Integro Accounting can help. We offer a suit of services to suit your needs: Accountancy Packages.
This advice has been provided by Workwell.
Setting up a limited company is exciting, but it can also be nerve-wracking. You will have a range of responsibilities such as registering with Companies House and starting a company bank account. While none of these things are difficult on their own, it can seem like a mountain to climb when you’re new to this way of working. With the help of a specialist contractor accountant, you can ensure everything is done compliantly and your systems and processes are set up in a way that is easy to manage – to give you a headstart from the word go.
To start with, knowing that you have a clear understanding of what money you’ll need, how working this way will impact your pension, the savings you have in place – as well as having a backup plan for your finances – will give you a big boost in confidence.
To help get you on your journey, here are some of the basic accountancy tasks you need to set up to start with:
Your formation checklist
⬜ Determine your SIC code and form your company
A SIC code (Standard Industry Code) will be needed when registering your company. This broadly describes the trading activities of your company.
⬜ Register with HMRC
Once the company is formed, registering with HMRC is a relatively straightforward process. You will need to submit a CT61G document that officially notifies HMRC of your new company’s details.
⬜ Register for Self-Assessment Tax
Registering for Self-Assessment Tax will ensure you comply with the rules: almost all company directors have to be registered to file an annual personal tax return.
⬜ Arrange payroll and National Insurance
As a company director, you are classed as an employee as well as an employer. This means you must pay Employees’ and Employers’ National Insurance.
⬜ Register for VAT
You will need to register for VAT if your turnover goes over £85,000 (unless you work in a sector that doesn’t operate VAT). You may also be able to use the flat-rate VAT scheme, which allows you to pay a fixed rate of VAT to HMRC and keep the difference between what you charge customers and what you pay to HMRC.
⬜ Open your business bank account
It’s vital to keep your business and personal finances separate. The best way to do this is through a business bank account, designed to process all your earnings and expenditure.
⬜ Set up bookkeeping arrangements to manage expenses and invoices
You’ll need to keep on top of your finances, keeping a regular record of any company-related expenses as well as copies of invoices you have sent to clients. Regularly updating your records and ensuring you have a clear filing system will help you determine your company profits and help you complete your Self-Assessment Tax Return accurately.
⬜ Create a balance sheet and review it regularly
A balance sheet lists your assets, liabilities and equity for a specific date, illustrating your business’s net worth and the financial health of your company. You can also use your balance sheet to determine how to meet your financial obligations and use credit to finance your processes. It’s sensible to review your balance sheet at the end of each accounting period – perhaps monthly or quarterly, enabling you to track your business’s progress as it grows, and identifying areas for improvement.
⬜ Create a P&L Statement for regular review
A P&L (Profit and Loss Account) or income statement shows how much profit and loss was generated by your company over a given period. It summarises the revenues, costs, and expenses incurred and should be issued monthly, quarterly and annually. It is important to compare P&L Statements from consecutive accounting periods to identify changes in revenue, operating costs, research and development expenses and net earnings over time.
⬜ Create a cash flow statement and forecast
A cash flow statement is a financial statement which summarises the quantities of cash (or cash equivalents) entering and leaving your company. The cash flow statement measures how well your company generates cash flow to pay debt obligations and fund ongoing expenses.
Once your business is up and running, you should discuss the options for preparing a cash flow forecast with your accountant. A cash flow forecast is the same information as a cash flow statement but based on future expected activities. The forecast, therefore, is very useful so that you can make sure your business has the funds it needs to stay afloat. Cash can often be required before all of your customers have paid you, so being familiar with your cash flow patterns is a great help in running a successful business.
Once you’re all set up with the items above, it’s best to keep on top of your finances by dedicating around 20 minutes per week to record-keeping. Here’s a list of some of the jobs you need to do, and how often you’ll normally need to attend to them.
Weekly tasks will include things like invoicing your clients/recruitment agency. You’ll also need to check your bank statements and keep accurate records of allowable business expenses (filing receipts for safe-keeping).
Once a quarter, you’ll need to submit a VAT return (if you’re VAT registered) and pay your Employers’ and Employees’ National Insurance and PAYE (if your pay level requires it). You should also create an updated P&L Statement and spend time analysing this against the previous quarter’s.
Annually, you will also need to submit an Annual Report to Companies House as well as year-end accountants to HMRC. You’ll also need to create a P&L Statement for the year and analyse this against that of the previous fiscal year.
Support and advice
When considering contracting through your own limited company, it’s important to seek specialist accountancy advice to check that this is the right route for you – as well as so you can get support with your company formation and ongoing financial management
How to pay yourself from a limited company
Having your own limited company comes with many perks to being your own boss… better work/life balance, flexibility, and no office politics. But the number one benefit is the tax advantages that can maximise your take home pay. You might be wondering how to pay yourself from a limited company. This is where dividends come in.
Most veteran freelancers are probably aware that, if you run your business as a limited company, paying yourself (at least partially) through dividends is tax efficient. But there is a right way and a wrong way to do this.
Read the guidance below from Integro Accounting to learn how dividends work, the benefits, the restrictions and whether paying yourself through dividends is right for your business.How to take dividends from a limited company
As an IPSE Plus member I rest easy knowing that support is just a phone call away. The tax and legal helplines have solved quite a few issues for me over the years. They have saved me a lot of pain and even got me a VAT refund!
Blue Cricket, Founder
Since the implementation of the new IR35 (Off-Payroll) reforms, many contractors are feeling disheartened about their future in self-employment - not least because many are having to work through umbrella companies for the first time.
Many freelancers who were previously working ‘outside’ IR35, have now been told they can no longer provide services through their limited company, raising questions about how they can continue working compliantly whilst maintaining the flexibility they have previously enjoyed.
There are various options available to you as a contractor depending on how you see your career progressing. Follow the link below to learn more about these options.What are my options post-IR35?
We have dedicated advice pages to help your physical and mental wellbeing whilst working from home but also on areas such as winning work or navigating the tax system. And to help and support you through all the challenges that can come with becoming self-employed, from chasing late payments to being able to work through power cuts and other emergencies.View all advice pages
Physical wellbeing advice
Running a business, or freelancing and contracting for clients, can be busy, stressful and all-consuming, but Ignoring your health and wellbeing can have serious implications for you, and your business.