If you’re new to self-employment, setting up as a sole trader is the easiest way to go. The registration process is simple, there’s almost no paperwork involved, and you don’t have to pay any registration fees.
Unsurprisingly, registering as a sole trader is the most popular way to do business in the UK. In 2019, 59% of privately-owned businesses were set up as sole traders.
So what steps do you need to take to get up and running as a sole trader in the UK?
What’s a sole trader?
You’re a sole trader if you run your own business as a self-employed individual, that is you’re self-employed but you’re not a partner in a partnership or a company director.
In simpler terms, when you’re a sole trader, you are the business. You enter contracts with clients and suppliers in your own name. And you engage subcontractors or hire employees in your own name, too.
As a sole trader, all the profits from your business belong to you, and you can use them as you please. The catch is that any debts or losses also belong to you (more on this in a minute).
Who has to register as a sole trader?
Before we dive into the nitty gritty of registering as a sole trader, it’s worth noting that, if you run your own business as an individual, you’re a sole trader by default. This holds true even if you don’t do anything.
That said, HMRC requires you to register as a sole trader if you meet any one of the following criteria:
- You earned more than £1,000 from your business in a single tax year (keep in mind that the UK tax year runs between April 6 and April 5). This is called the trading allowance — the amount you can earn from self-employment before the registration requirement is triggered
- You need to prove you’re self-employed, for example because you want to apply for government benefits or need a mortgage
- You want to pay National Insurance contributions. You won’t qualify for a state pension or other government benefits if you don’t pay National Insurance
How do I register as a sole trader?
If you’ve gone through the trouble of starting a business, you’re probably planning for it to become your primary source of income. Or, at least, you probably want it to be a good source of secondary income. This means it’s all but certain that you’ll go over the trading allowance, so you’ll have to register.
The good news is that you don’t have to register immediately. You have until the 5 October of your business’ second year to do it. So, if you start your business in July 2021, you have up to the 5th October 2022 to register with HMRC.
So how do you go about registering?
It’s as easy as taking the following steps:
- Figure out if being a sole trader is right for you
- Choose a trading name
- Tell HMRC
- Stay on top of your legal and tax responsibilities
Let’s have a more in-depth look at each step.
Is being a sole trader right for me?
Being a sole trader has some big advantages. In particular:
- Registering is simple and straightforward
- There’s little red tape. If you need money, for instance, you can just withdraw it from your business account. In comparison, if you’re set up as a limited company, you need to either make do with your salary or issue a dividend. Issuing a dividend involves paperwork, and there are rules you have to follow
- All your financial data is private
On the downside:
- As a sole trader, you’re fully liable for any debts. So if your business makes a big loss, your personal property, including your house, might be at risk. This is probably the biggest downside
- Some businesses might not want to deal with sole traders. In the IT contracting space, for instance, many clients only work with businesses that are registered as limited companies
- When your business grows beyond a certain point, being a sole trader may no longer be tax-efficient
With this in mind, registering as a sole trader may be right for you if you’re just dipping your toe into self employment, your overheads are low, and you’re unlikely to go into serious debt.
But if your business is risky — for example because you have to invest in expensive equipment or buy lots of stock just to get started — you may be better off setting up as a limited company. This is because a limited company is a separate legal entity. So, should things go wrong, your personal property will be safe.
Picking a trading name: what you need to know
As a sole trader, you have the option of trading under your own name or picking a trading name.
You don’t have to use a trading name. But if you do, there are rules you’ll have to follow.
HMRC says that your trading name can’t:
- Include the terms ‘limited’, ‘Ltd’, ‘limited liability partnership’, ‘LLP’, ‘public limited company’ or ‘plc’
- Be offensive or use a ‘sensitive’ word or expression
- Be similar to the name of an existing business
- Suggest a connection with government or local authorities, unless you have permission
If you do choose a business name, you must still use your real name on official paperwork such as invoices and contracts. Typically, you’d write your full name and surname t/a your business name. T/a means ‘trading as.
Telling HMRC you’re self-employed
You’ve decided registering as a sole trader is the way to go and you’ve picked a business name (or chosen to go with your own name and surname). It’s time to tell HMRC you’re self-employed.
To do this, do one of the following:
- Register for self-assessment on HMRC’s website. This is the easiest way to do it
- Download the form and mail it back to HMRC
- Call HMRC on 0300 200 3500
In all three cases, you’ll need your name, address, National Insurance number to hand. HMRC will also ask you some basic information about your business.
HMRC will then send you a Unique Taxpayer Reference Number, or UTR. You’ll need this to complete and file your self assessment tax return.
It’s worth registering for a Government Gateway account so you can file your self assessment tax return online. You’ll also be able to see how much tax you owe at a glance, apply for tax refunds, and have access to other useful services.
It’s notoriously difficult to get a hold of HMRC on the phone, so this will save you time and aggravation.
What are your responsibilities as a sole trader?
Registering as a sole trader may be the most straightforward way to get started as a business, but you’ll still have to make sure you have your legal ducks in a row.
In particular, you’ll need to:
Keep a record of your sales and business expenses
You’ll need to keep your invoices, receipts, and other income and expense records for at least 5 years after the self assessment submission deadline for that tax year. In the UK, the self assessment submission deadline is 31 January. So, you must keep your records for the 2021/22 tax year until at least 31 January 2028.
HMRC doesn’t have rules around how to keep your records. What’s important is that they’re complete, accurate, and readable. That said, you may find that accounting software is the simplest way to meet this requirement.
It’s worth noting that the government has been working on an initiative called Making Tax Digital, which will eventually require everyone to submit their self assessment tax return using approved software. Setting up accounting software now will save you work — and grief — down the line
Complete a self assessment tax return
If you file your taxes online, the deadline is the 31st January after the end of the tax year. So, to file your 2021/22 taxes, you have until 31 January 2023.
You can also file your self assessment by downloading a form and sending it by mail. But, in this case, the deadline is shorter — you have up to the 31st October following the end of the tax year. So, for 2021/2, the deadline for a paper return would be 31st October 2022.
Pay income tax and National Insurance
You’ll also have to pay Class 2 and Class 4 National Insurance. Class 2 National Insurance is £3.05 a week, and you’ll need to pay it if your profit is £6,515 or more a year (2021/2).
You’ll also have to pay Class 4 National Insurance if your profit is £9,568 or more a year.
Class 4 National Insurance is:
- 9% of your profits between £9,568 and £50,270
- 2% of any profits over £50,270
Bear in mind that, as a self-employed person, your income tax and national insurance contributions aren’t deducted automatically. You have to pay them after the fact. It’s a good idea to set some money aside for this every month, so you won’t get caught out when payment is due.
Register for VAT
You only have to register for VAT if your annual turnover, that is your total revenue over the space of a year, is £85,000 or more.
That said, registering for VAT means you can claim VAT back on business-related purchases such as books and even fuel. This means registering for VAT may be worth looking into even if you’re nowhere near reaching the mandatory registration threshold
Register for the Construction Industry Scheme
Do you contract or subcontract in the construction industry?
You’ll need to register for the Construction Industry Scheme.
Under this scheme, contractors can deduct money from their payments to subcontractors and pass them on to HMRC. These will count as advance income tax and National Insurance contribution payments
All set. You’re in business
Starting your own business can feel overwhelming. There are a million and one things to think about and do.
Luckily, registering as a sole trader is straightforward, so you can quickly tick it off your to-do list.
Too busy to read the whole article?
Here’s a quick checklist:
- Have a think about whether registering as a sole trader is right for you
- Decide whether to use a business name or trade in your own name. If you pick a business name, HMRC has rules about what’s acceptable and what isn’t
- You have to register as a sole trader by the 5 October of your second business year. If you miss the deadline, you could get fined
- Make sure you stay on top of your record-keeping, income tax, national insurance, and VAT obligations
- If you want to set up a business with another, or several, sole traders, you might consider a partnership.
That’s it. Let us know when you make your first million.