A sole trader is a self-employed and legally recognized sole owner of a business. It is the simplest and most popular business structure in the UK, making up almost 60% of businesses in 2019. Sole traders might be the sole owner of the business, but it doesn’t mean they have to work alone. They can hire people once they’ve registered as an employer with the HM Revenue and Customs (HMRC).
There are a lot of considerations to factor in when hiring employees as sole trader, but first, let’s get a better understanding of what a sole trader is.
What is a sole trader?
Being self-employed is a popular option nowadays. As the term suggests, being self-employed means being your boss, being in control of your time, and running your own business. This includes all the responsibilities of owning and running the business, such as paying taxes.
The word “self-employed” refers to the way you work and is not a business structure. Freelancers, consultants, and skilled labourers who control what work they do and choose to do it can be considered self-employed.
There are several legal business structures to choose from when you want to be your own boss:
- Sole trader: The business owner and the business are considered as one legal and financial entity.
- Business partnership: Works the same way as sole traders, but business ownership (and responsibilities) are shared between two or more co-owners.
- Limited company: The business functions as a separate legal entity from the owner(s). This protects the personal finances of the entrepreneur. Limited companies have to be registered with Companies House and must have a director.
Sole traders must register as self-employed with the HMRC and pay their income tax through the self-assessment system. As sole business owners, they benefit directly from all the profits after paying their due taxes.
Setting up your business as a sole trader is simple. However, the responsibilities that come with it are not. As the individual and the business are legally considered the same, all the liabilities of the business reflect on the individual. While they get the full profits of the business, personal financial risks are still high for sole traders.
Moreover, responsibilities such as accounting, filing tax returns, paying income taxes, and hiring decisions are shouldered by the sole trader.
Once you become a sole trader, you must inform the HMRC of your set up within three months. Otherwise, you’ll incur severe penalties. The latest you can register is October 5 after the end of the tax year (April 6 to April 5 of the following year). You will also be responsible for completing a self-assessment income tax return. Therefore, proper bookkeeping is a must.
Aside from paying income taxes, sole traders also shoulder National Insurance contributions (NICs). NICs for the self-employed are Class 2 and Class 4, depending on their annual profit.
Some sole traders must be VAT-registered when their turnover exceeds the VAT threshold. Of course, once your business grows and personal risk increases, a sole trader can opt to become a limited company.
Can a sole trader hire employees?
In a nutshell, yes. A sole trader can hire employees, whether full-time, part-time, or on a contractual basis, and there are no limits to the number of people you can hire. However, you will be responsible for collecting income taxes and NICs from the people under your payroll and submit those collections to HMRC. You will also need to register as an employer and operate a PAYE (Pay as You Earn) scheme for this purpose.
Can you hire family members as employees?
Again, the answer is yes. You can hire your partner/spouse, parents, siblings, even your kids. The general rule is you pay them for their hours of work as you would regular employees.
When hiring family members, there are several things worth noting. First, if your employed family member lives in the family home, they are outside the scope of the national minimum wage, but those who don’t live in the family home must be paid at least the minimum wage.
If their wages exceed the lower-earning limit, you must register as an employer with the HMRC and complete the required PAYE records and file annual returns.
You can also employ your children, even if they are still students, as long as they are within the legal working age. For the case of students, if you employ them outside their regular holidays, normal employer and tax laws apply. However, if you employ them solely during their breaks or over the holidays, you may be able to apply special rules to their pay. You might no longer be required to deduct tax in some cases, although you still need to account for national insurance.
Consult with an expert about the legalities of hiring your family members to avoid incurring penalties. If you want to know the full details, you can find it on the HMRC website.
Do you need to hire employees?
Some big businesses began as sole proprietorship. As your business expands, you will need more people to maintain the quality of your products and services. One person can’t be an expert in everything, and you’ll eventually need to hire employees when the need arises.
Hiring people comes with a learning curve for first-time employers. It goes without saying that ample research is required before jumping into the hiring process. Look into the legal responsibilities of an employer and consider your financial capabilities to shoulder hiring costs.
There is also the matter of hiring the right people, cultivating a good human resource team, and protecting your employees’ rights. Of course, you’ll want to maintain high-quality services by providing training and leadership programs somewhere down the line.
Lastly, there’s the endless paperwork and other administrative tasks associated with hiring. This includes everything from contracts, to wages, to insurance coverage.
One way to lessen the burden of hiring is getting an independent contractor or agency to take care of the employment process for you. However, if you are unsure about the specific legal and tax requirements involved, we recommend consulting with an expert to guide you in the right direction.
In line with that, you may appreciate having an expert assess your current financial systems. Contact Annette & Co. for a friendly chat about what you can do to improve your business gains even more! For more quick tips as well you can follow us on Instagram.