Tax Return

 UK Tax System

Limited Company

Self Employed

Sole Trader  

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Prime Advisors Ltd,
Ocean Air house
Suite 200, Floor 1,
750-760 High Road, Leytonstone,
London E11 3AW
Tel - 0044 208 530 6929
Fax - 0044 208 989 1179
E-mail: primeadvisors@yahoo.co.uk



Being a sole trader has considerable tax and paperwork minimization advantages. As a sole trader you will prepare accounts for your business activities and then, from these, prepare a personal tax return. Your income will be taxed at standard personal rates - so your tax rate on earnings above £29,400 (on top of your tax free personal allowance) will be 40%. As a sole trader has considerable latitude to offset expenses against sales the amount of income actually assessable for tax is reduced and many sole traders pay a relatively low proportion of their gross income in tax.
There is another substantial advantage too. While some-one marketing their services through a limited company may pay up to 20% of their fee income in NICs, a sole trader usually only pays 7%.
So why doesn’t everyone become a sole trader?
Firstly the tax advantages are so great that the Inland Revenue only grants sole trader status in certain circumstances - usually dependent on the number of customers that you have. Suppose you are currently employed by an organisation and you resign and then become a 'self employed' contractor to the same organisation. The Inland Revenue will argue that you are not self employed, but that you actually remain an employee of the client organisation and that you should pay tax accordingly under PAYE (Pay As You Earn).
If the organisation to which you are contracted pays you without deducting PAYE tax and you, as a sole trader, subsequently fail to pay tax on your earnings from that contract, then the Inland Revenue has the right to approach the organisation and to require them to pay your tax.
This is why so many organisations prefer to deal with consultants through the medium of a limited company, which hires out the services of the consultant, rather than hire the consultant directly.
The second disadvantage of being a sole trader is that you are personally liable to your customers, creditors, employees and to agencies such as the Inland Revenue and Customs & Excise for performance of contractual obligations and payment of NICs, income tax for yourself and your employees and VAT. While you can use insurance to protect yourself against certain of these, in the end it is your personal assets, your house and savings, that are at risk.
Thirdly being a sole trader is not appropriate for every business, for instance if you are setting up a business in conjunction with colleagues, or backed by investors who may want an exit strategy, incorporation is usually preferable.




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