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.
There is minimal paperwork to take care of, and you don’t have to pay any company formation costs. However, you do need to formally register as self employed with HMRC, and assume responsibility to pay your own income tax and National Insurance liabilities.
Here are the steps you must take to if you want to become 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’ second tax year. A tax year runs from 6 April to 5 April the following year.
So, for example, if you started a new business working as a sole trader in March 2017, you have until 5 October 2017 to register.
However, if you first undertake self employed work in May 2017, you have until 5 October 2018 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 – 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.
Decide on a name for your new business name
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 John Smith you could opt for, ‘John Smith trading as John Smith 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 get their accountant to deal with their tax affairs. A good accountant can safely negotiate this complex area, and can advise you on ways of paying less tax.
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 (2018/19) £2.95 a week. Sole traders must also pay Class 4 NI contributions which are currently; 9% on annual profits between £8,424 and £46,350 and 2% on profits above this (2018/19 tax year).
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 2018 is £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; ByteStart’s 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.
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 benefits and drawbacks of the options, and discuss with your accountant before jumping in.
Our formation partner, offers a 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).
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
- 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
Funding your business
- How to choose the right business loan
- How to maximise your chances of securing a small business loan
- Revolving credit facility – The short term funding solution every small business owner should know about
- 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
- 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
- 10 Top tips for small businesses starting out with social media