Chances are, the words 'tax', 'HMRC' and 'self-assessment' don't fill you with joy. When you're considering making the move from employee to self-employed, the bureaucracy involved can feel overwhelming. It doesn't have to be though.
It's not difficult to register as a sole trader in the UK and more people are becoming self-employed each year. HMRC allow you to register online quickly if you have the right information, although professional advice is sometimes recommended. Lots of people put off registering as they're unsure if they'll get enough self-employed work or think the paperwork will be difficult. Don't worry, we'll ease your concerns.
If you're planning on starting your own business or already have done, it's time to register as a sole trader. Once you're registered, you can operate legally and know that you're all set up for tax purposes. As a sole trader, your HMRC payments will also contribute to your state pension, so it's vital you register and log your earnings.
Keep reading to find out how quick and painless it is to register as a sole trader. We'll talk you through the process step-by-step so you're prepared.
Do You Need to Register as a Sole Trader to Be Self-Employed?
A lot of the time, becoming a sole trader is black and white. Many sole traders have quit their employed role and set up their own business so the need to register is clear. What if you're still employed though? What if you're doing a little bit of self-employed work on the side?
In the UK, you're allowed to earn up to £1,000 per year (correct at time of writing) before you must register as a sole trader. This means that if you make a small amount of money from side jobs each year, you might not have to register until your earnings go over that threshold. This allows people to make money from hobbies.
If your earnings will be over £1,000 a year though, you must register as a sole trader within three months of starting to trade. The term 'self-employed' is a general term for working for yourself although the different terms can be confusing.
What's the Difference Between Sole Trader, Sole Proprietor and Self-Employed?
When you're considering working for yourself, it's all too easy to get tangled up in the different terms. We can clear things up quickly though.
Self-employed and sole proprietor are both general terms that mean working for yourself. Sole trader, on the other hand, is the official term the British government use for people who register as self-employed. It means the same as self-employed and sole proprietor, but it's the official term for tax purposes.
It's important to note that when you register as a sole trader, you are running your own business, not a company. In the UK, a company is a registered legal entity by itself and as a sole trader, you are not running a company. Some people do form companies by themselves and become an employee of their own company. This is different from being a sole trader running your own business.
There are some benefits to forming a company that include not being personally responsible for losses. Forming a company doesn't have to be overwhelming but as there's more involved than being a sole trader, it's wise to get professional advice.
How to Register as a Sole Trader
The only place you can register as a sole trader with is HMRC (Her Majesty's Revenue and Customs, formerly known as the Inland Revenue). HMRC is responsible for collecting tax, national insurance contributions and some other payments, such as student loan repayments.
While you must register with HMRC, you don't have to do it yourself. Plenty of people opt for professional and affordable services that deal with the registration for them. This can take the worry of getting it right off your mind and you'll be safe in the knowledge you're registered properly.
Register for Self-Assessment
The first step is to register for self-assessment. This is a service on the government website that allows you to complete your own tax return each year. Your self-assessment tax return will be available to complete from April every year, after the new tax year has begun. The tax return you fill out will be for the tax year that has just ended.
Registering for self-assessment is a short process if you have the right information with you.
Choosing a Business Name
During the registration, you'll have to choose a business name. For some sole traders, this name will be their own name. However, sole traders will often be running a business that has its own name.
When choosing a business name, it's vital that it doesn't infringe on anyone else's copyright, cause confusion with another business or contain misleading words. Unlike starting a company, you don't have to register a unique name with Companies House. It can still be a good idea to protect your business name though, so nobody else can use it.
The most common way to protect your business' name is to register a dormant limited company under that name. You'll still be operating as a sole trader and not a company, but no one else will be able to use your business name as you've registered it.
Setting up Your Account
Once you've registered, HMRC will send you your new UTR (Unique Taxpayer Reference). This is a number that you'll receive in the post within 10 working days and you should keep it safe as you will need it to complete tax returns.
You will also receive a letter containing an activation code. You can use this to log into your new self-assessment HMRC account online. From this account, you'll be able to view your personal self-assessment dashboard. You'll also be able to update your information such as address or phone numbers.
Once you've logged into your self-assessment account, you're officially registered as a sole trader. Congratulations! Unfortunately, the bureaucracy doesn't quite stop there.
What You'll Have to Pay as a Sole Trader
As a sole trader, you are responsible for your tax return and paying any tax and contributions. As employees only see their paycheque after all the payments have been taken out, it can be confusing to adjust to different payments as a sole trader.
The deadlines for tax returns and payments can be confusing too with hefty fines if you're late or fill out your return incorrectly.
When you fill out your self-assessment tax return, HMRC will calculate how much tax you owe for that tax year, according to the information you've provided. They will also calculate the amount you owe on account.
Tax on account is an advance payment you make in advance for the following tax year's payments. This is usually half of the year's total tax. It can come as a nasty surprise in your first year, so it's important to take it into account.
National insurance contributions (NICs) are another payment you'll have to make as a sole trader. You also paid these as an employee but as it happens at source, you may not have been aware.
Sole traders must pay NIC 2 and NIC 4 contributions unless you are exempt. These contributions go towards your state pension and allowances such as maternity allowance and bereavement support allowance. NICs add up over the year so it's best to calculate how much you'll owe so you're not taken by surprise when you get your self-assessment calculation.
HMRC collect student loan repayments through the self-assessment system as well, so if you have student loan debt, you may need to repay it. The calculation is done for you according to the information you put into your self-assessment. While you don't have to do the maths yourself, it's a good idea to find out roughly how much you'll need to repay each year.
Tax Return Deadlines
Tax return deadlines can be confusing and many people miss them each year. Depending on your business, collecting all the information you need to complete your self-assessment return can be difficult. It's essential you keep track of all the money going into and out of your business as you go and keep detailed records.
Being organised will help you when it comes to filing your return. If your business is complex or you simply hate paperwork, hiring an accountant to do your tax return means they'll file it on time and correctly. Accountants can also save you money as they're experts at understanding business expenses, a complicated matter for many sole traders.
The online deadline for self-assessment and first payment is 31 January each year with the second payment on account deadline being 31 July.
Setting up as a Sole Trader Is a New Step on Your Journey
You'll need to register as a sole trader if you're starting your own business but not forming a limited company or other business structure. HMRC make the process quite simple but it's not as streamlined as it could be, leading to confusion and worry amongst new sole traders.
Registering as a sole trader means you need to submit your own self-assessment tax returns each year and are responsible for making the correct payments. You won't pay more in tax and other payments than you would if you were an employee, but you will see the payments separately which can be a surprise in your first year.
There's no need to bury your head under paperwork and wish it were easier. If you use our sole trader registration service, we do all the hard work for you. We can register you with HMRC, protect your business name and even send you deadline notifications. Check out our quick and easy sole trader service today and get started as a business owner.