How to register as a self-employed trade

What is a sole trader?

A sole trader is someone that is self-employed and runs their own business. When you become a sole trader, you’re responsible for managing your business’s finances. You’ll keep all profits after tax and be responsible for any losses made.

Setting up as a self-employed sole trader

To set up as a sole trader, you need to inform HMRC about your tax situation. As a sole trader, you will pay tax through self-assessment. You can register for self-assessment on the government website.

If you earned more than £1,000 from self-employment in the last tax year, you must set up as a sole trader. As a sole trader, it is your responsibility to record details of all earnings and submit an annual tax return to HMRC.

What is self-assessment?

The government call it registering for “self-assessment”.

A self-assessment is completed once a year. It’s a yearly review of your finances for the financial year. The financial year starts on 6th April and ends on April 5th the following year.

The way in which you complete it is by keeping track of your business’s finances across the year. You will provide your earnings and expenses to the government under self-assessment, and the government will calculate any tax owed by you or whether you are owed a repayment. It’s all based on your business’s money.

By registering for self-assessment, you’ve told the government you’re a self-employed individual and that you’re personally responsible for your business.

So once you register as self-employed, it’s really important to keep track of spending and earnings.

How to complete self-assessment as a sole trader

What happens once you register?

You will be given a unique number for your business and logins to your self-employed area. This is where you will be able to log in and submit your self-assessment in the future.

Does a sole trader have to register with Companies House?

Only if you’re setting up a limited company. When you set up a limited company, you have to register your company with Companies House. But, it isn’t essential that you register your sole trader name with Companies House. Having said that, you’ll still need to keep detailed records of your company accounts and pay taxes.

Registering can also be a good way to prove ownership of a company name at a later date. Such as if you want to stop others from using the same name as you.

Should I register for VAT as a sole trader?

VAT, or value-added tax, is an important part of our economy, but you may be wondering if you should register for VAT as a sole trader. You’re only required to register for VAT if your annual turnover will go over £85,000.

Please note, you can choose to register even if your turnover is lower than this if you’re planning to reclaim VAT later. We have a dedicated guide called “should I become VAT registered” which will also help you decide.

When is the sole trader self-assessment deadline?

There are deadlines set by the Government each year for sole traders to register for self-assessment. These dates are generally around the same time each year but you can find the correct dates for the current year on the Gov.uk website.

There are different dates for registering, submitting tax returns, and paying the tax you owe. Tax payments can sometimes be split as well, so there may be more than one due date.

Sole trader responsibilities

Sole traders have various responsibilities. As a sole trader, you must:

• Keep records of your accounts
• Keep records of any expenses
• File an annual self assessment tax return
• Pay income tax on earnings above £12,570
• Pay Class 2 and Class 4 National Insurance

As a sole trader, it’s important to budget accordingly. This can help you to manage your finances and ensure that your business can meet all financial obligations.

Sole trader tax calculator

The UK government website features a handy online tax calculator that is completely free to use with no registration required. It can help you to get a realistic idea of the amount of tax you will need to pay.

Simply enter your estimated weekly or monthly profit into the online calculator. You will then receive an instant breakdown detailing your expected weekly, monthly, and annual profits. And your expected tax and National Insurance payments.

The Construction Industry Scheme (CIS) for sole traders

If you work in the construction industry as a contractor or sub-contractor, you can register with HMRC for the Construction Industry Scheme (CIS). Contractors must register for the scheme and can deduct money from any sub-contractor’s payments and pass them directly to HMRC.

Sub-contractors do not need to register for CIS, but deductions from their pay will be made at a higher rate if they aren’t registered. According to HMRC, a contractor is classed as someone who pays sub-contractors for construction work, or a non-construction industry business that has spent more than £3 million on construction work in the year since the first payment was made.

The CIS covers all sorts of construction work including:

• Site preparation work (foundations, access etc.)
• Demolition work
• Building work
• Civil engineering
• Renovations, repairs, and decorating
• Heating, lighting, water, power, and ventilation systems installation
• Interior cleaning after construction

The CIS guide contains more detailed information about what types of work are covered by the scheme.

The importance of naming your business

Naming your business is an important part of raising brand awareness and securing more customers. Although you do not need to register your name, you must include your name and business name on any official paperwork including letters and invoices.

As a sole trader, there are certain rules you must follow when naming your business. Sole traders must not:

• Include ‘limited’, ‘Ltd’, ‘limited liability partnership’, ‘LLP’, ‘public limited company’ or ‘plc’
• Use potentially offensive words
• Use an existing trademark
• Use a sensitive word or expression
• Suggest a connection with local authorities or government without permission

You can check the availability of company names on the government website.

Benefits of being a sole trader

There are many benefits of becoming a sole trader. These include but are not limited to:

• Complete control of your company
• Flexibility to your customer’s needs
• Quick and easy set-up process
• Virtually no set-up costs
• Easy accounting and tax registration
• Fewer tax filing responsibilities
• Generous tax allowances and expenses
• Full profit retention
• Financial privacy

Setting up as a sole trader is an excellent first step into the world of company ownership. Many sole traders go on to set up limited companies. Working as a sole trader enables them to learn valuable business management skills.

Sole trader vs Limited company

The main difference between a sole trader and a limited company is that a sole trader, as the name suggests, is wholly responsible for business ownership. A limited company, on the other hand, has ownership split equally amongst several shareholders.

Running a business as a sole trader is far simpler than setting up a limited company. Sole traders have more flexibility with regard to business decisions and direction. Limited companies, however, have the potential to be more profitable.

In terms of tax responsibilities, sole traders pay between 20% – 40% income tax depending on their earnings. Limited companies pay a lower rate of 19% corporation tax and can also qualify for a larger range of expenses deductions and tax allowances.

Step-by-step to going self-employed

Thinking about taking the leap into becoming self-employed? It’s not such a leap when you have a detailed step-by-step to follow to go self-employed!

First, ask yourself the hard questions

There are a lot of exciting milestones when you set yourself up as a business owner. However, the main factors you need to think about when deciding whether to go self-employed include:

• The pros and cons
• How much tax you’ll pay
• Your earning potential
• Understanding all the legal side of things, like tax, national insurance and the responsibilities of being a registered business

Let’s break these down further in the next section.

Reflect on whether going self-employed is right for you

Being your own boss sounds like a dream, but it’s not for everyone. Firstly, you need to be a self-starter and willing to work super hard while you build your client base and market yourself. Most businesses fail in the first year, and this isn’t because some people are bad at what they do. Building a business is hard, and maintaining it is harder. But get it right, and you will reap the rewards.

Secondly, you need to be organised, which, let’s be honest, isn’t a lot of people’s forte. So, if the word ‘admin’ gives you shivers, self-employment might not be the best career path.

Lastly, only being responsible for yourself is either liberating or lonely, depending on your personality type. In the world of sole trading, it’s just you (unless of course, you hire other people further down the line).

Consider the pros and cons

As with all things, there are pros and cons to self-employment:

Pros

• Pure autonomy! No more drumming to someone else’s beat. You are in charge of the drumsticks now
• With great freedom comes great flexibility for other commitments and responsibilities
• Varied work and types of clients let you change and evolve over time
• More financial benefits, such as utility and travel tax reductions on your tax return
• Increased earning potential

Cons

• Setting yourself up and finding clients isn’t a walk in the park
• Start-up costs are essential, including admin systems like CRMs and invoicing software
• Keeping up and complying with industry regulations means research and admin
• Unstable income, at least at first, and no pay for time off such as holidays or sickness
• Solely responsible for the success or failure of your business
• A good work-life balance can be difficult to juggle

Understand the admin you need to do as a self-employed tradesperson

For UK sole traders, there are several things you need to do before you can tout your services as a self-employed tradesperson.

Let HMRC know you’re self-employed

This gives the UK government the head’s up that you’ll be paying tax through their Self Assessment portal from now on. You’ll also need to pay Class 2 and 4 National Insurance contributions.

Set up a business bank account

Hit up Google for some recommendations on the best business bank accounts on the market. It’s worth researching before investing your hard-earned cash into a banking provider.

Set up a way to easily record your finances

This includes business profits and expenses, receipts, and a summary of why and when you incurred each expense. Trust us, this will make your life easier when submitting your HMRC tax return before the 31st of January every year.

Read through your tenancy or mortgage agreement

Before you put your home address down as your business address, make sure that you can. There should be a term in your tenancy or mortgage agreement that specifies how you’re allowed to use the property. Usually, you have to notify your landlord or mortgage provider and get their permission. However, the worst-case scenario is they say no, and you have to use a virtual address instead.

Get your insurance in order

We have three words for you: professional indemnity insurance, and three more: public liability insurance. There could be more required for your specific trade, so make sure you’re covered.

Set up a pension pot

Consider setting up a private pension to best prepare for your future retirement.

Understanding the legal requirements of being self-employed

When you set yourself up as a self-employed tradesperson or sole trader, you must inform HMRC about your tax situation.

You must file a self-assessment return before the 31st of January every year.

So, what’s involved with getting yourself set up as a self-employed tradesperson, you ask?

The government website is full of all the information you need, but to summarise:

• Let HMRC know you’re now self-employed
• Find out what records you’ll need to keep as a self-employed tradesperson and business owner
• Look into insurance and business bank accounts to make your life easier
• Find out if you can put your own address down for your business
• Keep up-to-date with industry regulations

What to know about going self-employed but working for a company

Many entrepreneurs start out with a side hustle or part-time gig. Consequently, they stay in their current full-time role to keep up with living costs until they’re established enough to go full-time solo. If this is you, you’re a hybrid known as a SEEP (self-employed-employed person). This involves paying income tax in two ways: through PAYE and Self Assessment.

In another scenario, you’re self-employed but only work for one client or company, which raises HMRC alarm bells and makes them wonder whether the company calls you self-employed to avoid paying you National Insurance or giving you employment rights.

So, to make sure you’re not being conned, you’ll need to prove you’re self-employed. This means proving you’re given a choice of when and where you work, and in some cases, are paid through invoicing your long-term client. The easiest way to check if your arrangement is above board is to speak to your accountant or check the government website and the off-payroll rules (IR35).

Conclusion

Being your own boss is great and comes with several perks, and once you’re ready to register your business, it’s time for the fun bits! Your next steps include coming up with your business’s name, planning your marketing strategy, and taking the steps to get your business ready to trade.

For more helpful advice, read our guide on why you need a marketing plan

FAQs

Is it worth registering as a sole trader?

Yes. Registering as a sole trader is completely free and accounting and tax declaration are simple and easy.

What are the disadvantages of being a sole trader?

You have unlimited liability for any debts. This means that both business and private assets can be lost. All business decisions are yours and sometimes raising capital can be difficult. It can also be difficult to take holidays as a sole trader.

How much tax do sole traders pay?

• Earnings between £12,571 and £50,270 – the basic rate of 20%.
• Earnings between £50,271 and £150,000 – a higher rate of 40%.
• Earnings over £150,000 – an additional rate of 45%.

Earnings up to £12,570 are not taxed.

How do sole traders get paid?

Sole traders are paid using any profits the business makes. Instead of having a set salary, a sole trader can ‘draw’ money from any profits.

Can sole traders have employees?

Yes. A sole trader can employ staff the same as any other company. As a sole trader, you are responsible for correctly setting up the payroll and taxation of all your employees.