Becoming a sole trader is the simplest way to get your new business off the ground.
Once you have told HMRC of your intention to become self employed, you can start trading immediately, subject to any industry-specific licences you might need.
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.
As a general rule, if you decide to go self-employed, you must register with HMRC as soon as you start working for yourself.
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).
If you are thinking about becoming self-employed, there are three ways to register with HMRC:
a) Register online with HMRC here.
b) Call the Newly Self Employed Helpline on 0845 915 4515.
c) Fill in Form CWF1 here (PDF).
You should register the moment you start out as a sole trader, otherwise you could incur a financial penalty.
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 £2.75 per week: 2014/15 Tax Year).
Value Added Tax (VAT)
Despite registering as ‘self employed’, you will not automatically be registered for Value Added Tax.
You will have to register for VAT if your business turnover reaches the current 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 £81,000 (from 1st April 2014). 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.
Always consult your accountant if you have any questions on tax 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 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 in case something goes wrong.
Most self employed people will look at taking out public liability insurance and employers liability cover, as as well as any other policies required for industry-specific reasons, or if customers or clients require it.
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 help on ByteStart
If you are starting a new business, you will have plenty of important things to consider. Fortunately, ByteStart brings you help and tips on all aspects of starting and running a small business. For lots more great advice and help on successfully starting a new business make sure you read these guides;
- 10 advantages running your business as a limited company has over being a sole trader
- 5 things you must do when you go self employed
- Brilliant or bankrupt? How to work out if your business idea is viable
- How to develop a strong USP and how to use it to attract more and higher value customers
- Why it’s vitally important you plan your exit strategy before you start your business
- The secrets of getting a business bank loan