How to register as a self-employed trade

What is a sole trader?

A sole trader is someone who is self-employed and runs their own business.

When you become a sole trader, you’re responsible for managing your business’s finances and you’re in charge of paying yourself. You’ll keep all profits after tax and be responsible for any losses made too.

Sole trader vs self-employed: what is the difference?

The difference between the two terms is that ‘sole trader’ describes the actual structure of your business.

Whereas ‘self-employed’ means you are not employed by an organisation you pay tax through.

Sole trader responsibilities

Below, we’ve outlined some general sole trader responsibilities:

• 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 manage your finances and ensure your business meets all financial obligations.

Pay your taxes – see what to expect with this 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 how much tax you will need to pay.

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.

Pros and cons of becoming a sole trader

If you become a sole trader, there are various benefits. 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.

As with all things, there are also some cons to self-employment:

• 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

Sole trader vs Limited company

The difference between a sole trader and a limited company is that a sole trader is 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. They can also qualify for a larger range of expenses deductions and tax allowances.

If you’re wondering how to pay less tax as a sole trader, you’ll need to look into tax relief options.

If you’re ready, follow these steps to becoming a self-employed trade

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!

First, ask yourself the hard questions

There are a lot of exciting milestones when you set yourself up as a business owner.

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 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 employees further down the line).

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

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

Let HMRC know you’re going self-employed

You must let HMRC know about your change in employment/tax situation.

As a sole trader, you will pay tax through self-assessment. And the first step is to 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.

What is self-assessment?

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

How 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. Then 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 filling out a sole trader self-assessment, you’ve told the government you’re self-employed and that you’re responsible for your business.

So, once you register as self-employed, keeping track of spending and earnings is really important.

What happens once you register?

Once you register as a self-employed sole trader, you’ll 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.

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 yearly.

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 insurances 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.

Understand 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

Final step, get your new business featured on Checkatrade

We have millions of homeowners, landlords and renters every month searching for trade businesses just like yours.

Find out more about how we can get you more work and the many benefits our Checkatrade members get if they pass our checks!

Should I register for VAT as a sole trader?

You’re only required to register for VAT if your annual turnover exceeds £85,000.

However, you can choose to register 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 help you decide.

The importance of naming your business

When setting up as a sole trader, effectively naming your business helps to raise brand awareness and secure customers.

Although you don’t need to register your name, you must include your name and business name on official paperwork including invoices. (Invoicing for self-employed tradespeople is another key thing to master.)

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 use the government website’s company name availability checker to see whether your desired name is free.

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

Wondering if can I be a sole trader and employed? 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.

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, raising HMRC alarm bells. They may 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).

Are you ready to be your own boss?

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 name, planning your marketing strategy, and getting 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.

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.

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.

What is The Construction Industry Scheme (CIS) for sole traders?

If you work in construction as a contractor/ 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 don’t need to register for CIS. However, deductions from their pay will be made at a higher rate if they don’t.

According to HMRC, a contractor is classed as someone who pays sub-contractors for construction work. Or a non-construction business that spent more than £3 million on construction work in the year since the first payment.

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.