Becoming a sole trader is the simplest way to get your new business off the ground.
You can start trading immediately, subject to any industry-specific licences or insurances you might be required to have.
As a sole trader, you will have complete control over your business and finances. You can adapt quickly to any changes in your business, without having to concern yourself with a great deal of bureaucracy.
If you run your business as a sole trader, no distinction is made between your personal and business finances. It is therefore crucially important you realise that should anything go wrong with your venture, you will be personally liable for any business debts.
This isn’t the case if you went down the limited company route, so it is worth spending time considering which business structure is best for you.
Starting up in business as a sole trader
Sole traders do not need to notify Companies House, nor deal with any of the administrative or accounting requirements which are required of limited companies.
If you decide to go self-employed, you should register with HMRC. The general advice is that you should register with HMRC as soon as you start working for yourself, but you don’t have rush to inform them.
HMRC state that if you do start working as a sole trader you must register with them by 5 October of your business’ second tax year.
So, if you started your business at any time during the 2016/17 tax year (from 6 April 2016 to 5 April 2017) you will need to register with HMRC by 5 October 2017.
If you are unsure whether you need to register as self-employed, you can refer to HMRC’s leaflet ‘Employed or Self Employed’ for Tax & National Insurance here (in PDF format).
Different ways to register with HMRC as self employed
If you are thinking about becoming self-employed, there are different ways to register with HMRC. Your individual circumstances will determine which of the 3 methods you need to use to register:
1. Going self employed for the first time and HAVE NOT previously completed a tax return
If you have not previously submitted a self assessment tax return, you should register your new business online with HMRC here. By doing this, you will be registering for Self Assessment tax and Class 2 National Insurance at the same time.
2. Going self employed for the first time and HAVE previously completed a tax return
If you are becoming a sole trader for the first time and have previously completed a Self Assessment Tax Return in an individual capacity – for example, if you have received an income which isn’t taxed at source such as rent or investment income – you must register as self-employed and for Class 2 National Insurance by completing form CWF1.
Doing this will enable you to keep your existing Self Assessment account.
3. You have been registered as a sole trader previously
If you have previously been registered as self employed, and are looking to re-register, you should do this with form CWF1.
Tax & National Insurance
As a sole trader, your business income is counted alongside any other personal income you have for tax purposes, so accounting is relatively straightforward.
Your tax is calculated via the annual self-assessment process. You will have to pay income tax and National Insurance Contributions (NICs) on your profits. Any losses you make can be offset against your other income.
When you fill in your annual self-assessment form, HMRC will calculate any Class 4 NICs you have to pay on your business profits.
Sole traders also have to pay Class 2 NI contributions (currently £2.85 per week in the 2017/18 Tax Year). However, the Government has announced that Class 2 NICs will be abolished from April 2018. This could save self employed workers £140/year.
For more in-depth information on the taxes you will need to pay when you are self-employed , read our popular ‘Sole Trader Tax Guide’.
Value Added Tax (VAT)
Despite registering as ‘self employed’, you will not automatically be registered for Value Added Tax (VAT).
You will have to register for VAT if your business turnover reaches the current VAT registration threshold during any 12 month period, or if you expect it to do so in the coming 12 months.
At present, the annual threshold for registering is £85,000 (from 1st April 2017). The current standard VAT rate is 20%.
When you register your business for VAT, you will need to charge VAT to all your customers.
Being VAT-registered means that you will be able to claim back the VAT you have paid on work related costs.
It is possible that you will be better off if you register for VAT even if your annual turnover is below the annual threshold. This is most likely if the majority of your customers are VAT-registered businesses, so can reclaim the VAT you have charged them.
You may be better off using the Flat Rate VAT scheme, which provides a simple way of accounting for VAT using an annual percentage depending on your industry type.
It’s always a good idea to consult your accountant if you have any questions on tax and VAT matters.
Business insurance for sole traders
Once you’ve decided to become a sole trader, you should think about taking out the appropriate business insurance cover for your new venture.
Some types of insurance policies are mandatory, such as Employers’ Liability Insurance if you employ people, whereas others will simply provide peace of mind that your business will be protected if something goes wrong.
Most self employed people will look at taking out public liability insurance and employers liability cover, as well as any other policies required for industry-specific reasons, or demanded by clients.
Sole Trader bank account
Once you set up as a sole trader, you will most likely want to open a business bank account As a sole trader, you can open an account with a specific name such as “Peter Smith Trading As PTS Construction”.
There is no legal requirement to open a separate bank account to your personal one, but many sole traders elect to do so. It may be simpler for accounting purposes, and look more professional. The choice is up to you.
Don’t necessarily open an account with your personal bank account, as you may get a better deal elsewhere. You will often find that the major high street banks offer 12 to 24 months’ free banking, which can represent a significant saving in monthly transaction fees.
See our guide to choosing a business bank account, which includes details of some of the current free banking offers on the market here.
Other considerations when becoming a sole trader
The sole trader route is the most popular way of starting up in business in the UK, however it is not the best route for everyone, which is why we always recommend discussing your choices with an accountant or other suitably qualified business adviser.
Sole traders are liable for any business debts or losses they make, or if forced into bankruptcy, whereas the liability of limited company directors is, as the name suggests, limited.
Always remember, that if you become a sole trader, you can easily switch to the limited company route later on if you want to.
Sole Trader Package
Our partner, Duport, has launched a new Sole Trader Package which will help you get up and running as a sole trader in a matter of hours (including the forms you need to register with HMRC).
The package will also protect your company name in case you want to become a limited company at some time in the future.
More on starting and running your own business
ByteStart is packed with help and tips on all aspects of starting and running a small business. Check out some of our most popular guides;
- 5 things you must do when you go self employed
- 10 advantages running your business as a limited company has over being a sole trader
- How to set up a limited company
- How to choose the best online accounting software for your business
- 15 Questions to ask when hiring an accountant for your new business
Leading a business
- How to be a leader rather than a manager
- Developing your startup’s greatest asset – YOU
- The Founder’s dilemma – Managing the transformation from start-up to growth business
- Building your resilience to help you cope with the ups and downs of starting and running your own business
- Why the best leaders do less
Funding your business
- How to maximise your chances of securing a small business loan
- A Guide to ‘Alternative Finance’ – the new funding options for startups and small businesses
- Finding finance for your new business – funding advice for start-ups
- How peer-to-peer lending offers businesses a new funding option
- What to do when the bank says “NO”!
Money & Tax matters
- 10 ways small business owners can pay less tax
- Sole trader tax – a guide for start-ups and the newly self employed
- Dividend tax changes from April 2016 – A summary of the financial effects for small business owners
- ByteStart’s Guide to the main business taxes
- Corporation Tax – How to reduce your bill
Promoting your business
- Making your small business a BIG hit online – A Digital marketing guide for small business owners
- How to create business cards that make a big impression
- The “Magic 10” Tips on networking – how the experts build great networks
- A Practical guide to Content Marketing for small business owners and start-ups
- 10 Top tips for small businesses starting out with social media
- Which types of insurance must your business have?
- Becoming an employer – Your responsibilities when you hire staff
- Health & Safety compliance for small businesses – where do you start?
- A Guide to the National Living Wage for small business owners
- Why it’s vital you have clear ‘Terms & Conditions’ for your business