Posted 5 months ago by Tracy
Once you’ve decided that operating as a sole trader is the right legal structure for your business, it’s important to follow all the necessary steps to ensure you’re properly registered and able to start trading. Fortunately, as a sole trader, this is a relatively straightforward process.
The first step is to decide on your company name. While you won’t have to register this with Companies House, you do have to follow the general rules that it can’t be the same as an existing trademark; it can’t contain any words deemed sensitive or offensive, and it can’t include Ltd, LLP or plc. You can check company name availability with Companies House.
Once you have a shortlist of names, it’s also worth checking if relevant domain names are available, as you’ll want your name and your online offering to match, so customers know how to find you. Most major web hosting companies will also offer a domain availability search function to do this.
If you’re expecting to earn more than £1,000 a year through your business, you’ll need to register as self-employed so you can file a self-assessment and pay tax accordingly.
When registering for self assessment online, you’ll be given the option to do so as self-employed. You must do this by 5th October in your business’s second year, or you could face a fine from HMRC.
Once you’ve completed your registration, HMRC will send you a 10-digit Unique Taxpayer Reference (UTR) and an activation code for your online account. You can use the latter to set up your account, and it’s then a case of submitting your annual tax returns via this account.
While the reporting requirements on sole traders are less onerous than those on limited companies, to submit an accurate self-assessment, you’ll need to keep a record of all your business incomings and outgoings to prepare your self-assessment.
As a sole trader, you’re not legally required to have a separate business bank account – you can operate your business from an existing account or even set up another personal account – but it’s often a good idea to keep business and personal finances separate. This will make it much clearer what belongs where when it comes to reporting to HMRC. It’ll also make it simpler for you to manage your business budget and forecasts as you’ll have a more accurate picture of your business incomings and outgoings.
Having a bank account in your business name will also help to build your credit history, which will be necessary should you need a business loan in the future. It should also be noted that some personal bank accounts can’t be used for business purposes.
When starting as a sole trader, one of the more common questions is how much tax will I be expected to pay and how do I pay it?
How much you pay will depend on your business profits (minus your allowable expenses). You’ll then pay Class 2 and 4 National Insurance and Income Tax on those profits. HMRC’s calculator can give you an estimate of how much this might be.
As with all UK residents, sole traders have a £12,570 tax-free personal allowance. Basic, higher and additional tax rates will then apply as usual. So, if your gross income is £40,000, £12,570 is tax-free, leaving £27,430, which will be taxed at the basic rate of 20%.
If your income grows to £65,000, your taxable income will be £52,430, taking you above the higher rate taxable income level of £50,270, so you’ll pay 40% tax on the difference.
The deadline for submitting your self-assessment is 31st October if you’re doing so by paper and 31st January for online. This is also the date by which your tax must be paid.
One thing to be aware of is that you may also need to make a payment on account at this time. This will be the case if you’re a UK taxpayer who pays less than 80% of your income tax at source and your tax bill is more than £1,000. This payment will be half of the previous year’s bill. You’ll also be expected to make a further payment by 31st July. HMRC will inform you of the amount and send a reminder near the time.
As a sole trader, you will also be required to register for VAT if you expect to make sales of £85,000 or more in a 12-month period. In this case, you will need to charge VAT to your customers and submit VAT returns to HMRC. The right accounting software can make this process much simpler. For example, AccountsPortal offers the ability to create custom tax rates, run a VAT report in seconds and automatically submit your return to HMRC via Making Tax Digital.
In fact, accounting software can help to reduce the burden of operating as a sole trader, minimising the time you need to spend managing your finances and letting you focus more on actually running your business. Look for tools that offer real-time reporting to provide a clear and accurate picture of your financial situation at all times, the ability to send clear, professional, personalised invoices and track and chase payments quickly and that enable accurate and easy reporting of all your tax obligations.
If you would like to learn more about how remain in employment and become a sole trader at the same time, read our blog can I be employed and self employed at the same time?