The simplest way to start a business in the UK is to become self employed. This is also commonly referred to as becoming a sole trader.
Here are the steps you must take to if you want to register as self employed, plus the other aspects you will also need to consider when working for yourself.
Register with HMRC to tell them you are becoming self employed
HMRC suggests that you should register with them as soon as you become self-employed. However, you do not have to register as a sole trader until the 5th of October in your business’s second tax year.
A tax year runs from 6th April to 5th April the following year.
So, for example, if you started a new business working as a sole trader in March 2022, you have until 5th October 2022 to register.
However, if you first undertake self employed work in May 2022, you have until 5th October 2023 to register as a sole trader with HMRC.
Depending on your personal circumstances, you will need to register with HMRC by one of these three different methods;
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; or 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.
Choose a name for your new business
What are you going to call your business? For many new business owners, this is the most exciting start-up task and one that lots of time is spent on!
Some people simply trade under their own name, or say they are; ‘Your Name trading as Business Name‘. For example, if you were David Adams you could opt for, ‘David Adams trading as David Adams Plumbers’.
Don’t forget to check to see whether your preferred business name is already being used. There is no register of business names used by self-employed people so you should do an online search to see whether someone is already running a business with your preferred name.
If someone has beaten you to it, and you want to avoid any potential legal claims against you, it’s best you think again, and come up with an alternative name for your new business.
Being self-employed means you are responsible for your own tax and National Insurance liabilities
Once you have registered as self-employed with HMRC you will become responsible for calculating and paying your own tax and National Insurance liabilities. This means that you will need to complete and submit a self-assessment tax return to HMRC every year.
The vast majority of sole traders hire an accountant to deal with their tax affairs. A good accountant can safely negotiate this complex area, and advise you on the most tax-efficient way to operate.
A smart move is to put tax money aside in a separate bank account from day one. If you do this, you will never find yourself scrabbling around and looking behind the sofa to find the money to meet a tax payment. Your accountant will be able to guide you on how much tax you can expect to pay.
As a sole trader, you will also be responsible for paying your own National Insurance Contributions (NICs).
You will need to pay Class 2 NICs – currently (2022/3) £3.15 a week above £6,725 per year.
Sole traders must also pay Class 4 NI contributions which are currently; 10.25% on annual profits between £9,880* and £50,270 and 3.25% on profits above this (2022/3 tax year).
This threshold rises to £12,570 from July 6th 2022. Over the tax year as a whole, this means the threshold is £11,908.
You can find the current NIC rates and allowances here.
The rules aren’t straightforward, so it’s wise to consult your accountant for advice specific to your financial situation.
Should you register for VAT?
If your business has, or is likely to have, an annual turnover of more than the current VAT registration threshold, you will need to register for VAT. The registration threshold for the year from April 2022 remains £85,000.
You will need to keep a close eye on how well your new business is doing, because once your annual turnover passes the threshold, you only have 30 days to register.
You don’t have to wait for your turnover to reach the threshold to register for VAT. You can become VAT-registered at any time.
In some cases, it might be beneficial for you to register for VAT as soon as you start up. For more details on VAT read; our 60-second guide to Value Added Tax (VAT) for start-ups and small businesses.
With some types of business, you need to get a licence before you can start working. For example, if you want to set up as a taxi driver you will need to apply for a licence from your local authority.
It’s the same for many other types of work, including being a child minder running a restaurant or pub, or being a market trader. And to get a licence, you will typically have to do some specific training and gain relevant qualifications.
You may also have to go through an inspection to ensure your business is shipshape and legal.
Setting up a bank account
If you’re a sole trader, you don’t have to open a separate business bank account, but there are many good reasons for doing so.
For a limited time, if you open a business account with Tide, they will credit all Bytestart visitors with £50, with no catches. Plus, you will also qualify for 12 months of free transfers. Simply click here to take advantage of this offer.
You might not need an extensive amount of cover, but we suggest you read our article which explains which types of insurance you must have in place (by law), and which types are worth exploring for your peace of mind.
For self-employed business insurance, we recommend Qdos – they provide a very transparent service, and specialise in providing cover for small business owners. We have recommended Qdos for over 15 years.
Should you go self employed, or set up a limited company?
When you are starting a new business the decision on whether to become self employed or to form a limited company is an important one.
Read ByteStart’s guides;
- 10 advantages of running your business as a limited company instead of being self employed and
- 7 advantages a sole trader (self employed) business has over a limited company
to find out some of the key differences between these two business structures.
You should carefully consider the pros and cons of each option, and discuss with your accountant before taking the leap.