Registering as a sole trader
Setting up as a sole trader remains the most popular way to start trading. Find out what's involved and how to register as a sole trader
If you want to go it alone starting a small business (becoming a ‘sole trader’), you’re in good company. A massive 75% of all British businesses have no employees according to Department for Business Innovation and Skills (BIS) figures. So you could say that sole traders pretty much drive the UK economy.
The popularity of this type of business reflects the ease with which you can start sole trading. Sole trader registration is straightforward, record keeping is simple and you get to keep all the profits after tax: if you’re ready to start the process of registering self employed as a sole trader, take a look at our step-by-step guide (with screenshots) of how to register self-employed with HMRC.
What is a sole trader?
A sole trader is when an individual is the only owner of the business and has complete control over the way it is run. This is the most common type of business ownership, of the three types: sole proprietorship or sole trading, partnership and limited company. Starting small by sole trading is a way to test your chosen market – many businesses are born this way.
However, the law makes no distinction between the business and the individual/sole trader. This unlimited liability means that any business debt can be met from the owner’s personal wealth if the business fails. And the business usually ceases on the owner’s retirement or death.
A sole trading business is usually small in size, with a low turnover, and few, if any, employees. But there are an estimated 4.8 million active private sector businesses in the UK and 3.6 million of these are class zero businesses – that is, businesses without employees.
This majority of sole trading enterprises are in the service sector, including photographers, plumbers, hairdressers, shops, real estate agencies and bed & breakfast hotels. Approximately 1 million size class zero businesses are in the construction sector and 1.1 million are in business-related services. Although it’s easy to start a business as a sole trader, it may be worth comparing the business types and preparing for the future.
When do you become a sole trader?
If you earn any money not through a salary or commission from an employer then you’re considered self-employed, and in most cases this will make you a sole trader (unless you’ve deliberately set up as a partnership or limited company). Regardless of whether you’ve earned enough to require you to pay tax, if you meet this definition you will be required to register with HMRC for self-assessment.
In some cases it can be hard to determine at what point to register as a sole trader: when, for example, does selling on eBay turn into a business? HMRC rules stipulate that you must register as a sole trader if you meet any of the following criteria: selling goods that were bought with the intention of reselling, selling items that you made yourself for a profit, selling or buying on behalf of others for financial gain, or receiving payment for a service.
When do you need to register as a sole trader?
You’ll need to register for self assessment by 5 October in the second tax year after you started trading. For example, if, from the definitions above, you started trading on 1 January 2017, the latest date you could register self employed would be 5 October 2017.
How much can you earn as a sole trader before paying tax?
£11,500 is the personal allowance of tax-free income earned between 6 April 2017 and 5 April 2018. Anything above this will be subject to tax (20% on anything over £11,500 and under £45,000). It’s worth noting that £11,500 is the allowance across all income sources. As a self-employed sole trader, you’ll have to complete a self-assessment tax return to HMRC. This involves filling in a tax return form, either online or paper, in which you inform HMRC of your income and capital gains, or in which you may claim tax allowances or reliefs. To do this, you will need to register as a sole trader: once this is done, HMRC will set up tax records for you and will send you a Unique Taxpayer Reference (UTR). You can read more about how to register as self employed here
Usually, HMRC will send you your self-assessment tax return in April. However, if yours doesn’t arrive by the end of April, contact your tax office.
If you’re a self-employed sole trader you are also liable to pay National Insurance (NI) contributions if you have profits above the Small Profits Threshold of £6025 for the year between 6 April 2017 and 5 April 2018. If this applies, you’ll pay Class 2 NI contributions at a flat rate of £2.85 per week. If your profits are over £8164 for the year, you’ll also pay Class 4 NI contributions at a rate of 9% of the profits you make between £8,164 and £45,000 (and a further 2% over that amount).
Finally, if you expect to have a turnover of more than £85,000 a year, VAT is applied to your earnings, which also involves contacting HMRC.
To register for VAT you’ll need to fill in one or more forms, depending on your business’ circumstances, and then submit them to HMRC. Most businesses only have to complete one form, with the exception of partnerships and groups of companies.
All this may seem quite daunting at first, but if managed properly it’s really not as overwhelming as it seems. The best thing you can do is stay organised, maintain your paperwork and flag up any tax or self-assessment deadlines in your diary well in advance so you have adequate time to prepare for them. Startups.co.uk also has a contact form for you to claim a free consultation to discuss with a local accountant here.
Becoming a sole trader
You will need to fulfil certain legal requirements before you can open for business:
Put it on paper: If you are going to trade under a name different to your own personal name you must display the name/s of the owners and an address where documents can be served on all business stationery and at your premises. Design letterheads, business cards and signage accordingly.
Use the right name: A business name means the name of your business if it is different to your your own name. It is not compulsory to register a business name but you can do so with the National Business Register.
You also need to be careful about choosing a name since the wrong name can get you into difficulties.
Certain words and expressions like international, federation and registered are restricted under the Business Names Act 1985 and the Company and Business Names Regulations 1995. Companies House and the National Business Register have lists of these words and details of how to obtain approval to use them.
Your business name can not be the same or too similar to that of another business, trademark or company. If it does conflict you could face legal action from its owner. Check phone books, trade journals and magazines to ensure against clashes and you can run free name checks against all these via the National Business Register as well as the Intellectual Property Office and the limited companies names index at Companies House.
To be absolutely sure that you can use a name, contact a solicitor to perform the checks or register your name with the National Business Register who will do the checks for you and ensure nobody copies it the future or passes it off as their own.
Inform the authorities: You must register as self-employed with the HMRC within three months of starting up or face a £100 fine. The three month limit starts from the last day of your first month of trading. Find out more about registering as self-employed here.