A sole trader is a single person business (though you can still take on staff) with no legal distinction between the business and its owner. If you want a simple way of contracting with little paperwork and all the benefits of being your own boss, then this is probably the one for you.
By trading as a sole trader, you still have complete control over your business but have less administration and responsibilities than your limited company directors, it is very simple to set up as a sole trader (all you have to do is register for Self-Assessment with HMRC) and you are not effected by the IR35 legislation.
On the other hand, you pay income tax and NIC on all of your profits minus an expenses allowance, but you may still be able to increase your pay with higher paying contracts than your previous permanent salary. Your personal and business finances are also seen as one by law and thus your personal finances are at risk should the business ever turn to disaster. Another major con is that most end users will not take on sole traders as contractors, preferring those working through limited companies or umbrellas (see below).
As a sole trader, you will need to pay income tax and both Class 2 and Class 4 national insurance contributions which apply to your turnover, minus allowable expenses. For Class 4 contributions, you will just need to send a Self-Assessment tax return every year (even if you don’t owe anything) by the next 31st January after the tax year end for online tax returns and 31st October after the tax year end for paper tax returns. All payments must be made by the 31st January deadline. For Class 2 contributions, you must either set up a Direct Debit with HMRC (by sending a completed DDI form available on their website) or respond to payment requests from HMRC twice a year. From April 2016, the payment of Class 2 contributions will join the Self-Assessment return system and will be paid in the same way as Class 4 contributions.
As with limited company directors, you may need to register for VAT if you are likely to turnover £81,000 in any 12 month period.
Although the running of a partnership is largely the same to a sole trader working individually, there are a few extra considerations when going into a business partnership. You may have greater financial resources as a partnership and you can share responsibilities adding greater flexibility in your work life, but you also share responsibility for each other’s negligence and shortcomings.
In order to get started, the partnership members must nominate one partner to be responsible for the partnership’s tax returns and keeping business records. To register for Self-Assessment, the nominated partner must first register the partnership and then themselves. The second partner will then register themselves only. All partners share responsibility for the business so whilst the nominated partner is responsible for sending the partnerships tax returns, all partners are still responsible for their personal tax returns, paying their income tax and NICs, any losses and any bills.
As you will be working as a partnership business but also self-employed individuals, you may wish to trade as simply your own names or have a business name, but remember that whichever you choose, it is important to include all partners’ names and business name, if applicable, on all official documentation including invoices.
With greater flexibility, higher job satisfaction and generally better pay, it is no wonder that so many of us are looking to leave permanent jobs behind and set out on our own.
There are many reasons to start contracting but before you do, firstly consider whether contracting is the right option for you. Contracting can carry with it many benefits, such as being your own boss, providing a more flexible work and personal life balance, higher take home pay, flexible working hours and a variety of tasks, locations and people to keep things from getting too mundane. But it can also come with tasks and responsibilities that not everybody is suited to dealing with, such as administrative burdens, compliance with relevant legislations, tax accountability, responsibility for your own training, marketing requirements to ensure you have work and financial planning to account for time out of work which will no longer be looked after by an employer.
It is important before branching out on your own to assess whether you have the confidence, a realistic approach and, most importantly, motivation needed for a successful contracting career.
All of the above advantages and disadvantages to going contracting are dependent on which trading style you ultimately choose. You will need to spend some time contemplating the different trading styles available to the self-employed worker and choose the best one for you.