According to an article published by Small Business, the number of sole proprietorships has grown by 28 percent in the last 10 years.
It’s not always simple when it comes to understanding which employment title is best suited to your position. Let us delve into how we differentiate between a sole trader and a self employed individual.
What is a Sole Trader?
A sole-trader is a self-employed person who is also the business’s sole owner. As a sole trader, your personal assets aren’t separate from your business assets, which means that if you owe money and don’t pay it back, creditors can seize your property and/or home.
Sole Trader vs Limited Company
When it comes to a company’s structure, it’s vital that those setting up the business can assess which one is most suitable for them. It is important to note that if a sole trader earns over £100,000 per annum, then it’s strongly advised that they set up a limited company. Whilst defining as a sole trader doesn’t require as much administrative work, such as annual accounts and registering with Companies House, it does leave an individual much more vulnerable to creditors.
Sole Trader’s Accounts
The financial responsibility borne by sole traders can be manageable in some instances, but not in others. Sole traders’ method of accounting isn’t set by law, meaning they don’t have to supply elements such as a balance sheet, when submitting their accounts. Nevertheless, sole traders must follow accepted accounting principles, in order to give a true and fair representation of their financial position, this is the same for conventional partnerships. Despite it being compulsory for sole traders to present a balance sheet, they’re incredibly useful when it comes to assessing a businesses’ fiscal situation.
Paying National Insurance and Taxes
A sole trader’s firm does not have a separate identity from the person who owns it. Consequently, their monetary gains are added to any other taxable income they have and if the total exceeds their personal allowance, they will be subject to income tax.
Sole traders pay two types of national insurance, Class 2 and Class 4. Class 2 is paid by those earning above £6,515 for 2021/21, with Class 4 contributions as a percentage of the businesses profits. Class 4 NICs are nine percent of profits between the sums of £9,568 and £50,270, as of 2020/21.
Is There a Difference Between Self-Employed and Sole Trader?
In short, yes but only a small one. The definition of a sole trader, as we already established earlier in this article, is self-employed. However, typically the term sole trader is used to describe the structure of the business and a self employed individual is someone who is not employed by someone else, nor do they pay tax through PAYE.
Find your Ideal Direct Debit Solution
Are you a sole trader looking for a reliable and fast direct debit service? At FastPay we have a wealth of experience when it comes to direct debit payment, ensuring this side of your business is taken care of in a hassle free manner.
If you have any queries, get in touch with a member of our team online or alternatively, you can call us on 0161 737 5290.
