Setting up as a self-employed sole trader is the simplest and quickest way to start your business. There is paperwork to do, but it is relatively straightforward. There are no registration fees to pay, but you must register with HM Revenue & Customs for tax and National Insurance purposes. Record keeping and accounting is straightforward, and there are some great benefits of being your own boss.
These notes explain the consequences of, and the legal requirements for, setting up as a sole trader. You will find out how to meet your tax responsibilities by filling in your Self Assessment tax return each year and paying your tax and National Insurance. Finally, our checklist will help you make sure that you have put your business on a proper legal footing.
Anyone can set up in business as a sole trader.
Working from home
If you run a business from home, you can claim a small proportion of your home costs against your business for running your business from home..
Bear in mind that there may also be restrictions in the deeds of your property or, if you rent, in the rental or lease agreement.
Choosing a name for your business
You can trade under your own name, eg A N Other, or use another business name, eg “Really Quick Deliveries”.
If you decide to use a business name, you must make sure that your business stationery displays your name as well as the trading name of the business for example, A N Other, trading as Really Quick Deliveries”.
Your trading name should not be the same as, or too similar to, that of a business which already exists. Be careful that it does not contain words that people might find offensive or misleading.
Registering for tax and National Insurance
When you become self-employed you must register with HM Revenue & Customs (HMRC) so that they can set up the right tax and National Insurance records for you. Once you’ve registered, HMRC will send you a Unique Taxpayer Reference number (UTR) and you’ll then complete a Self Assessment tax return each year.
Even if you already complete a Self Assessment tax return, you can still complete a Self Assessment registration form to tell HMRC about your self-employment.
It’s best if you register as soon as you become self-employed. You must register at the latest by 5 October after the end of the tax year for which you need a tax return. The tax year runs from 6 April one year to 5 April the next. So if, for example, you have tax to pay on your business profits for the 2010-11 tax year, you need to let HMRC know by 5 October 2011.
If you register late you may have to pay a penalty.
Registering for VAT
If you expect your business to have turnover of more than £77,000, you will need to charge VAT to your customers and pass this on to HMRC.
Arranging to make National Insurance contributions
As well as registering with HM Revenue & Customs (HMRC) so that they can set up records for your tax and National Insurance contributions (NICs) you’ll need to arrange to pay Class 2 NICs. For the tax year 2012-13 the Class 2 NICs rate is £2.65 a week.
The most convenient way to pay Class 2 NICs is via Direct Debit. Paying by Direct Debit has many advantages:
- it’s easy to set up – just fill in the application form and send it to HMRC – you will need a suitable account at a bank or building society
- it runs automatically – once set up, you don’t have to remember to make payments
- you can choose to pay monthly or six monthly
- it helps your budgeting – for people in business, good cash flow and budgeting are essential and paying by Direct Debit means that your payments are always made in arrears of your liability.
- it gives you peace of mind – payments are made on time, every time and there is no risk of losing benefit because you forgot to pay
Applying to be exempt from paying Class 2 NICs
If you expect your income from your business to be low for the tax year you may not have to pay Class 2 NICs.
If you need any more information please don’t hesitate to contact us.
Checklist: setting up as self-employed
To set yourself up as self-employed there are several things you must do. Make sure that you:
- register straight away for Self Assessment with HM Revenue & Customs (HMRC) so they can set up your tax and National Insurance records
- obtain any permits and planning permission that you may need from your local authority
- contact your local authority to find out whether you need to pay business rates
- contact HMRC to register for VAT if you expect to have turnover of more than £73,000 a year
- register with HMRC for PAYE (Pay As You Earn) if you employ staff
- register with HMRC if you are a contractor or subcontractor in the construction industry
- set up a financial record-keeping system
- put your name on all your business stationery, including letters, invoices, receipts and cheques.
I have over 25 years’ experience of assisting our clients becoming and maintaining their self-employment.
We will consult with you free of charge on any of the matters above. If you instruct us to act for you we will handle the whole process for you, including the entire form filling process.
Please call us if you have any questions at all.