Freelancers' Questions: Is it easier to close down if I'm a sole trader?

Freelancer’s Question: In the event I have to stop freelancing, would it be easier if I were a sole trader rather than a limited company? To wind up a limited company sounds complex and timely. However if I don’t get a lot of business as a sole trader, I worry that my trading income might be less than the payable tax/NI bill, as I understand that sole traders must pay two lots of national insurance. Please advise me.

Expert’s Answer: Whatever the reason to close your business, to ensure you pay the right amount of tax you would need to collect any money you are owed, and pay all your outstanding bills.

This would include your regular operating costs up until the point your business closes, including utility and telephone bills. Other than that, if you are not successful as a sole trader you can simply cease the sole trader business and inform HMRC of this. You must also inform HMRC if you want to close your business but are VAT-registered.

As regards your likely tax position, your Income Tax and Class 4 National Insurance liability, as a sole trader, would be calculated with reference to the profits you make, so the liability would never exceed the trading income.

As a sole trader (expecting to earn profits in excess of £5,075per year) you will also be required to make Class 2 National Insurance contributions which are at a fixed amount of £2.40 per week or £128.40 for the year. It is therefore unlikely that your tax and NI billwill be bigger than your profits.

The expert was Martin Hesketh, managing director of accountancy firm Brookson .

 

6th March 2011

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