Did you know there are over 3 million sole traders in the UK? Flexible working, the chance to choose your own projects, and the freedom to be your own boss make it a popular choice.
But the fact is, branching out with a sparkling new business of your very own can be pretty scary. Telling HMRC that you’re self-employed and making sure you pay the right amount of tax are important starting points, so we’ve put together this article to help.
A sole trader is someone who runs their own business as an individual. With this type of structure there’s no legal distinction between you and the business, so you’re considered to be one and the same.
This means that you’re personally responsible for any liabilities in the business (such as repaying loans), so your personal assets can be at risk if the business struggles to pay its bills.
Being self-employed means that you own and run your own business, and being a sole trader is one of the ways that you can do this. The two terms are often used interchangeably!
Do I need to set up as a sole trader?
If you’re an individual who earns income from self-employment which is less than the £1,000 Trading Allowance, then you might not need to tell HMRC or pay tax on this part of your income. You can claim the Trading Allowance even if you earn money from another source too, such as an employer that you work for full-time.
It’s a great chance to get creative and make it obvious what your business is or does, but make sure it’s not the same (or very similar to) any business name that already exists. It mustn’t be offensive in any way either, or suggest a connection with a local authority or government body. Additionally, you can’t add ‘Ltd’ or ‘LLP’, as you would for a company or partnership.
Once you’ve logged into your Government Gateway area, you’ll see the option to “add a tax” to your account.
Step 3: Choose ‘Self Assessment’ (for self-employed, partnerships and trusts)
From the category list, choose ‘individual or sole trader’. It’s important you select this one as there are different rules for setting up other types of businesses.
What happens next?
Once you’ve set up as a sole trader with HMRC, you will be sent a Unique Taxpayer Reference (UTR), which you’ll need in order to access the Self Assessment service. HMRC will send out a separate letter containing an activation code so you can get your online account live too.
You can use these to sign into your Personal Tax Account, which is where you’ll find information like what your tax code is, how much tax you owe, when your next Self Assessment is due and what tax you’ve paid in previous years.
Is there a deadline for setting up as a sole trader?
Make sure you tell HMRC about your sole trader status by 5th October in your second tax year. For example, if you start your business in November 2022:
Your first tax year runs 6th April 2022 to 5th April 2023
Your second tax year runs 6th April 2023 to 5th April 2024
The deadline to register using this example is 5th October 2023.
What records do I need to keep?
The big thing we really want to emphasise here is to keep records! Clear, up-to-date financial records are so important, and should cover at least the last five years’ income and expenditure.
These records will be essential in helping you fill out your Self Assessment tax return accurately, and will also help you to claim tax relief on all those allowable expenses – they soon add up!
HMRC use this information to calculate what income tax and National Insurance you need to pay. It’s also an opportunity for you to tell HMRC if there have been any significant changes in your business finances or personal circumstances.
The amount of tax that you owe depends on how much you earn during the year, and how you earn it. If you work for an employer and have a sole trader business on the side, then your self-employment earnings will be added to your wages to work out which tax rate you’ll pay.