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Starting a small business at home can be challenging, but if you love what you do and have the determination and focus, there’s no reason you can’t build your own fantastic enterprise. However, it’s crucial to do your research first, especially when it comes to understanding small business finance.
This guide provides helpful sole trader advice to get you started, from choosing a bank account to managing taxes.
What’s the best bank account for a sole trader?
In most cases, it’s easy to open a bank account as a sole trader, with some people even using their personal account for their business. As long as you keep your business and personal finances separate, it can be convenient—at least until your business gets bigger. Keeping them separate will also help when it’s time to file your self-assessment tax return.
Many high street banks offer startup sole trader accounts, including Natwest, Barclays, Santander, and Lloyds, with some offering extra perks like free banking for a certain period or business advice. It's important to shop around for the best deal.
When choosing an account, consider:
- Debit card: Handy if you shop online or make frequent purchases.
- Chequebook: Some businesses still accept cheques, giving you a few extra days before money leaves your account, which can help with cash flow.
- Mobile banking: A must for monitoring your account on the go, especially for home offices or frequent travellers.
- Overdraft facility: Ask about this when setting up your account. Cash flow can be unpredictable, and an overdraft may come in handy for covering short-term expenses.
If you choose not to open a new sole trader account, consider opening a savings account to set aside funds for HMRC. This will help you manage your sole trader tax obligations and avoid surprises when it’s time to file.
Can a sole trader pay themselves a salary?
As a sole trader, you don’t take a formal salary like a limited company director. Instead, you can withdraw money from your business whenever you need it. This flexibility is one of the benefits of being a sole trader.
However, it’s essential to leave enough money in the business to cover your expenses and tax obligations. Any income you withdraw will still be subject to income tax and National Insurance contributions.
When should I start paying myself?
The simple answer is: when your business can afford it! In the early days, it’s best to reinvest earnings back into the business. If you can live off personal savings for a while, it gives your business a better chance to grow.
Once you have stable cash flow and have set aside enough for taxes, you can start withdrawing more regularly. Just ensure you’re keeping enough for tax when you pay yourself from your business.
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How to manage your finances as a sole trader
Good financial management is key to any successful business. As a sole trader, it’s important to maintain a clear record of your income and expenses. This will make it easier to file your self assessment tax return and calculate your sole trader tax.
Sole trader tax advice includes:
- Keep receipts for all business expenses. You’ll need these to claim deductions when filing your tax return.
- Track mileage if you use a personal vehicle for business purposes. You can claim for business miles, which reduces your taxable income.
- Set aside money for taxes. It’s a good habit to put aside a percentage of your income for your sole trader tax obligations throughout the year.
- Consider using accounting software. This makes it easier to manage your books, track cash flow, and stay on top of your tax obligations.
How can I save money working from home?
With mobile technology now the norm, it’s becoming increasingly common for people to work from home. Remote work offers flexibility and cost-saving benefits, including:
- Save on travel costs: Avoiding commuting can save you on fuel, parking, or public transport costs.
- Lower childcare costs: If you're managing your business from home, you can plan work around your family’s schedule, cutting down on childcare expenses.
- Save on food and drink: Preparing meals at home can save you the cost of eating out or buying lunch every day.
Don’t forget that if you work from home, you can claim part of your household expenses as business expenses. This includes a portion of your electricity, internet, and even rent or mortgage interest.
Your common questions answered
As a sole trader, you must keep detailed records of all your income and expenses. This includes receipts for purchases, invoices issued, and a log of any mileage if you're using a personal vehicle for business purposes.
Keeping your accounts organised will make it easier to complete your self assessment tax return.
Accurate record-keeping is essential for staying on top of your finances and filing taxes. It helps you track your income, manage cash flow, and ensures you’re ready for tax season.
If HMRC ever conducts an audit, well-kept records will help prove that your finances are in order. This is why staying organised is a key part of any sole trader tax guide.
Sole traders are responsible for paying income tax on their profits, as well as Class 2 and Class 4 National Insurance contributions. The amount you pay depends on your total earnings. You’ll need to report your earnings each year by filing a self assessment tax return.
Yes, sole traders can claim a wide range of business expenses to reduce their tax bill. These include office supplies, travel expenses, and a portion of your home bills if you run your business from home.
Make sure to keep receipts and accurate records to support your claims on your self assessment tax return.
Although not legally required, opening a business bank account makes managing your finances much easier. It helps you keep personal and business transactions separate, simplifies bookkeeping, and makes tax season less stressful.
Hiring an accountant is not mandatory, but it’s highly recommended, especially if you’re unfamiliar with tax laws. An accountant can provide expert sole trader tax advice, ensure your self assessment tax return is accurate, and help you maximise eligible deductions. An accountant also saves you time and effort, allowing you to focus more on running your business.
Sole traders can access various finance options, including small business loans, crowdfunding, and peer-to-peer lending. Alternative lenders often offer loans tailored for sole traders. Personal savings or loans from friends and family are also common ways to finance your business in the early stages.
Having an accountant can be extremely valuable, especially as your business grows.
Not only can they provide sole trader tax advice, but they can also prepare your self assessment tax return and ensure you’re benefiting from all available deductions. They can offer insight into financial planning and tax-saving strategies, making it a worthwhile investment.
Yes, you can lend money to your business as a sole trader.
It’s a common way to finance a new business, particularly when starting out. Just make sure to keep records of any money you lend or withdraw to maintain clear accounts for tax purposes.
Yes, self-employed individuals, including sole traders, can access small business loans from traditional banks or alternative lenders.
Your personal credit history and the business’s cash flow will play a key role in loan approval.
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