Becoming a Sole Trader
Registering as a sole trader is easier than setting up a limited company. There is less paperwork, your business affairs remain private and you can keep all the profits you make after tax.
However, as a sole trader you’re liable for any debts that your business incurs, which means your savings, home and other possessions are at risk from creditors. If the nature of self-employment means you’re likely to build up substantial debts then consider setting up a limited company instead.
For a guide to setting up a Limited company See
Naming a Business
You can trade under your own name or select a specific business name. Be aware that if you opt for a business name you must make sure that your business stationery shows your own name as well as the trading name of the business.
Don’t pick a name that’s the same or too similar to that of an existing company – you could end up with a legal dispute. Research online for businesses with similar names in your local area and check the register at Companies House to see if a limited company with that name already exists.
Register as a Sole Trader
Setting up as a sole trader is straightforward. You need to register with HMRC within three months of becoming self-employed.
You can register by calling the HMRC Newly Self-Employed Helpline on 0300 200 3500 or by register at HMRC online.
You’ll need to provide the HMRC with your name, date of birth, address, telephone number, National Insurance number, the name and type of your business and the start date.
Sole Trader Tax
As a sole trader you’ll need to pay income tax based on your business profits, along with National Insurance contributions (NICs).
This is done through a process called self-assessment, which involves submitting a form each year to HM Revenue & Customs (HMRC) to calculate what you owe in tax and then paying the required amount.
Once you’re registered as self-employed you’ll get a letter, usually in April, telling you when you need to complete your first self-assessment form.
Sign up for Self Assessment
You or your accountant must complete a self-assessment form each year for HMRC detailing your income and business expenses for the last tax year.
As a sole trader running a small business you can use a cash accounting method, which means you’ll only have to pay tax on the money that actually comes into and out of your business during the tax year. You can deduct business expenses such as the cost of vehicles, computers, stationery, as well as day-to-day running costs like electricity to reduce the amount of income tax payable.
Any money owed for the tax year ending in April must be paid by January 31 the following year. HMRC may ask you to make a payment on account for the current tax year, in which case you’ll need to do this by July 31st.
You can complete a paper self-assessment form to be submitted by 31 October or an online version by 31st January the following year. With its later deadline, filling in the online form is best and you’ll see instantly how much you’ll have to pay.
An online account for your self-assessment is set up automatically when you register as self-employed. You’ll be sent a Unique Tax Reference (UTR) number which you’ll need when completing your self-assessment and for all correspondence with the HMRC.
As a sole trader you must pay Class 2 National Insurance contributions (NICs). This is collected at the same time as your tax payment via self-assessment. You may need to pay Class 4 NICs if your annual profits exceed £8,060 but this will be calculated automatically when you fill in your annual self-assessment form.