Being a sole trader is the simplest way to run a business: it does not involve paying any registration fees. Keeping records and accounts are straightforward and you keep all the profits. However you are personally liable for any debt that your business runs up which makes this a risky option for businesses that need a lot of investment.
You need to register as self-employed – see self-employment.
You have to make an annual self assessment tax return to HM Revenue & Customs. You must also keep records showing your business income and expenses.
Any profits the business makes will be yours after deduction of income tax and national insurance. You can decide to draw all the profits out or re-invest in the business.
Tax and National Insurance
As you are self-employed, you will pay income tax on your profit through the Self Assessment system as well as Class 2 and Class 4 National Insurance.
Class 2 National Insurance is fixed rate and Class 4 National Insurance contributions calculated on your profits.
You will also have to pay VAT if you reach the registration threshold.
As a sole trader, you are personally responsible for any debts run up by your business. This means your home or other assets may be at risk if your business runs into trouble.