“Never call an accountant a credit to his profession; a good accountant is a debit to his profession.” - Charles Lyell
When you work for yourself, accounting can be a nightmare, especially when it’s not your main job and it only seems to get in the way of you and your business.
However, that’s not why you have to do it and small business owners and sole traders need to manage their finances and do their accounting. There are benefits to getting your accounting right. However, most sole traders are merely amateur accountants. This means they’re hardly experts in the field and need to put in a lot of work to get the most out of their business finances.
Not interested in accounting?
Few self-employed workers are.
The Advantages of Not Having a Real Accountant
Those who are registered as sole traders are free to do their accounts, which can have its advantages.
Let us explain.
For one, there are a few ways to run your business and you can choose the one that’s best for you and how you want your business to grow. We’re not suggesting any kind of fraud, we’re just saying that there are several legal ways to financially run your business.
It also means that you can keep a closer eye on your finances. Of course, you can always hire an accountant if you can’t be bothered with all that.
Then there’s also all the records and bookkeeping you have to do just to make sure that everything is above board. To top it all off, you also have to submit your tax returns and VAT returns (if you’re registered for VAT).
Registering for VAT
In the UK, a sole trader doesn't have to register for VAT if their turnover is less than £85,000 during 12 months. This amount can change so you need to keep an eye on it, especially if your turnover is close to the threshold. Similarly, if you don't register for VAT within 30 days of reaching the threshold, you could face a fine.
Again, you don't need to register for VAT, but for some businesses, sole traders, or contractors, it might be worthwhile from a financial perspective to register for VAT anyway. By registering for VAT you can reclaim VAT on purchases you make.
If the amount in VAT you get back from purchases is more than what you'd have to pass on to HMRC from your sales, it's probably worthwhile registering. However, if it's close, the extra time involved in doing the paperwork might not make it worth it and you also have to charge your customers higher prices, which can make your products less appealing.
Of course, if you deal with other VAT registered businesses, it won't matter as you'll all be able to claim back the VAT.
Tax Rates for Sole-Traders
In the UK, the self-employed, sole traders, and contractors will pay income tax based on their earnings. If you've worked as an employee, then you'll be familiar with the income tax you pay on your earnings.
A sole trader won't pay anything on the first £12,500 they earn but will pay a 20% tax rate on earnings between £12,500 and £50,000. Between £50,000 to £150,000, they'll be taxed at 40% and beyond £150,000, they'll be charged 45%.
Keep in mind that these rates are applied only to the money earned beyond each threshold meaning that somebody who earns £55,000 will be charged 0% for the first £12,500, 20% for the next £37,500 they earn, and 40% for the £5,000 they earned beyond the Higher Rate threshold.
In Scotland, things are a little bit different but the system works much in the same way. However, there are brackets at 19%, 20%, 21%, 41%, and 46%.
The Advantages of Being a Sole Trader
Running your own business or working for yourself can come with a lot of benefits, financial and otherwise. As for non-financial benefits, the most obvious one is that you're the boss.
If you're self-employed, you're in charge of your own business, can set your hours, and answer to no one. Of course, that also means that the buck stops with you and any failings will be fully your responsibility. Some people love the freedom this affords while others mightn't enjoy the pressure that comes with all the responsibility.
You can be much more flexible if you work for yourself, too. You won't be micromanaged and can fit work around your life and schedule. Of course, certain types of work may come with strict deadlines or you may have to answer to your customers, especially if you want your business to be a success.
Accounting for sole traders is also far simpler than for a limited company. If you work for yourself and your finances are quite simple, there's no reason you can't do your accounts. Of course, if you want to focus fully on the business and can afford it, there's no reason you can't just hire an accountant to do all your accounting for you.
Becoming a sole trader can also be good for you financially. After all, you get to keep all the earnings, especially if you're not hiring anyone else or using contractors. Again, since everything belongs to you, everything is also your responsibility both in terms of your business' success and your financial and legal obligations.
Becoming a sole trader is also very simple and it's just as easy to stop, too. If you want to freelance for a bit, for example, you just need to contact HMRC and let them know that you're setting up as a sole trader. Similarly, once you're done being a sole trader, letting HMRC know that you've ceased trading is also quite simple.
If you're interested in learning more about economics, finance, or accounting, consider getting help from one of the many talented and experienced private tutors on Superprof.
You can learn about managing your money and accounting with face-to-face tutorials, online tutoring, or group classes. Each type of tutorial comes with its pros and cons so think carefully about what you're looking for in a tutor, how much you can afford to pay, and how you like to learn.
Face-to-face tutors can offer a bespoke service and teach you whatever you'd like to learn. They tend to charge more than the other types of tutoring since they plan and tailor their lessons to their students and will sometimes have to travel to their students. However, since every minute of each tutorial is spent teaching you, this is arguably the most cost-effective way to learn.
Group tutorials are great for those on a budget. If you're the kind of person who likes learning in a social environment, this type of tutoring could be for you. Since you'll all be sharing the cost of the tutor's time and expertise, these types of lessons tend to work out cheaper per student per hour. Of course, you can't expect the tutor to tailor the lessons just to you, though.
If you can't find any suitable or available tutors in your local area, consider learning with an online tutor. You can look for tutors all over the UK and around the world to teach you via webcam. Of course, if you're learning about accounting, you might want to make sure that they're familiar with the legal requirements in the UK for accounting as you don't want to get any of it wrong.
Fortunately, a lot of the tutors on Superprof offer the first lesson for free. These free lessons are a great opportunity for students to try out several potential private tutors before deciding on which one is right for them. It's a good idea to outline what you're looking for in a tutor and how much you can afford to pay before you start shortlisting potential tutors and contacting them for private lessons.
You might be spending a lot of time with your private tutor so remember that it's important that they can teach you what you need to learn and that you get on well with them.
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