If you are establishing a business on your own, then you are probably going to set up as a sole trader. Setting up as a sole trader means you are your own boss, and it is often the simplest way to start a business, but you need to be sure to adhere to a few regulations to get started. Here’s how to set up as a sole trader.

What is a sole trader?

A sole trader is a self-employed individual who owns and runs their own business. Being self-employed means that you don’t work for an employer or pay tax through PAYE.

A sole trader can keep all their business’s profits after tax, is the legal entity in their own right, and is personally responsible for any losses the business makes.

You will need to set up as a sole trader if you earned more than £1000 from self-employment in the most recent tax year, need to prove your self-employment status for example to claim for Tax-Free Childcare, or want to make Class 2 National Insurance payments to help qualify for benefits and the state pension.

1. Naming your business

To set up as a sole trader, you first need to choose a unique name that is not being used by another business. This could be your own name or a business name but, whatever you choose, you should consider registering the name as a trademark to ensure no one else uses the name for their own business.

Sole trader business names cannot include the words ‘limited’, ‘Ltd’, limited liability partnership’, ‘LLP’, ‘public limited company’ or ‘PLC’. The name also cannot suggest a connection with the government or a local authority unless you have permission.

2. Registering your business

To set up as a sole trader, you need to register your business with HMRC. This is a free and fairly simple process. It is best to do this as soon as you start up your business, as you could incur a penalty if you fail to do so by the 5th of October in your second business year.

3. Paying tax

As a sole trader, you will need to pay income tax on any profits your business makes via Self-Assessment. By registering as a sole trader with HMRC, you are informing them that you will be paying tax via this method and you will need to file a tax return every year. When you have registered as a sole trader, HMRC will send you a 10-digit Unique Taxpayer Reference (UTR) and set up your online account for filing tax returns.

All business owners in the UK must complete and send a tax return every year, which details the business’s income, profits, and expenses.

4. Paying VAT

If your turnover is over £85,000 a year (or you expect it to be), then you will need to register for VAT, which you can do online here. HMRC will then send you a VAT registration certificate with your VAT number and when to submit your first VAT Return.

When you are VAT registered, you must charge your customers VAT on the goods and services you provide. You can also register voluntarily for VAT if it suits your business even if your turnover is less than £85,000, providing what you sell is not VAT exempt.

5. Paying National Insurance

In addition to your income tax and any VAT you need to pay, you will usually also need to pay Class 2 and Class 4 National Insurance.

You usually pay Class 2 National Insurance if your business’s profits are £6515 or more a year, and Class 4 if the profits are £9569 or more a year. Most people pay this National Insurance as part of their Self-Assessment.

6. Hiring employees and your payroll system

Even though, as a sole trader, you are self-employed and own and run your business, you are allowed to hire employees. If you do take on any employees, you will need to provide contracts of employment for each employee and operate a Pay as You Earn (PAYE) payroll system to provide their wages. You will also need to collect income tax and national insurance contributions from your employees and you may need to provide a pension scheme.

7. Keeping tax records

As the owner of your business, it is your responsibility to keep records of all your business’s sales and expenses to complete your tax returns. Because of this, it is important that you adopt a system of keeping and organising financial records that works for you.

It is a good idea to store these records in date order to make it easier when it comes to completing your Self-Assessment. Remember that it is easier to maintain a record-keeping system from the start than to try and implement one retrospectively.

Hopefully you are now better informed on how to set up as a sole trader. It may be one of the simplest ways to start a new business, but there are a few things to remember to stay tax compliant, so if you need any further advice, or are looking for an accountant to manage your business finances, please get in touch and we will be happy to help.