According to the government, three-quarters of all British businesses are sole traders, which amounts to about 3.6m businesses out of some 4.8m firms. Sole traders (aka the “self-employed”) drive the UK economy.
All you need do is call the HMRC ‘Helpline for the Newly Self-Employed’ on 0845 915 4515. You’ll be asked for your name, date of birth, address, telephone number, National Insurance number, business start date, name and type of business and whether you’re a sole trader or working with a partner. You can register even online or download and complete the HMRC form ‘Becoming self-employed and registering for National Insurance contributions and/or tax’.
You must register as self-employed with the HMRC within three months of starting your business or you risk a £100 fine. Best advice? Do it straight away, there’s no point in delaying.
As a sole trader, you are the business. It’s not a separate legal entity, as it would be if you formed a limited company. Therefore, you’re liable for your business’s debts. If you’re starting a business that won’t build up big debts, becoming a sole trader isn’t too risky. If you are likely to build up significant debts, you should consider setting up a limited company.
You have to pay to set up a limited company and running it requires slightly more administrative effort when it comes to tax. Registering as a sole-trader costs nothing, while accounting costs and tax liabilities are likely to be cheaper than if you started a limited company.
But if you do employ people, you must collect income tax and National Insurance contributions (NICs) from them and pay these to HMRC. You’ll need to operate a PAYE (Pay As You Earn) payroll scheme for this purpose.
You pay income tax based on your business profits. You (or your accountant) must fill in a self-assessment tax return each year, detailing your income and expenses. You’ll also have to make flat-rate Class 2 NICs throughout the year (£2.50 a week payable every six months). If your annual profits are more than £7,225, you’ll also have to pay Class 4 NICs (9 per cent on profits up to £42,475; 11 per cent on annual profits above this figure). You pay this with your income tax and the figure is calculated from your self-assessment tax return.
That includes details of all your sales. You must also keep proof of any expenses (eg receipts, invoices, utility bills, etc). Anyway, they’ll help when you’re filling in your tax returns. Keeping basic financial records (aka Bookkeeping) doesn’t have to be as arduous as it might sound.
If your turnover exceeds the VAT threshold (currently £73,000 a year), you will need to register for VAT. When you’re VAT registered, you charge your customers VAT on VAT-able goods and pay it to HMRC. In turn, you can reclaim the VAT you pay on goods and services you buy.
The size and nature of your business can change quickly and for a range of reasons (including increased exposure to risk) you might want to set up your own limited company (“incorporate”) at a later stage. Providing someone else hasn’t already registered the name, you should be able to use your sole trader name (with Ltd added, of course).
Self-employed people pay tax on the 31 January following the end of their tax year. Crucially, HMRC will request payments on account for the following year’s estimated tax – on 31 January and 31 July each year. That means, after your first year in business, your tax bill could be 150 per cent of what you were expecting to pay, with another 50 per cent payable in July. If your business income is very low, you may not have to pay Class 2 National Insurance contributions.
When it comes time to pay HMRC, you’ll be glad you put a few quid away each month. Being faced with a large tax bill you haven’t saved for is a nightmare. Try to put 25 per cent of your grow earnings into a separate bank account (and don’t dip into it). Failing to pay your tax bill on time will result in penalty charges.
Crucially, you’ve got be good at sales and marketing. If you don’t make enough sales, your business will fail – simple. There will be admin tasks to take care of, too, including simple accounting/bookkeeping. Paying an accountant to do your tax return can save you time, but you’ll still have to maintain simple financial records. Having to manage employees for the first time could prove a big challenge, too.
Mark Williams is a freelance journalist and editor of Start Up Donut.