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Registering as a sole trader

What is a sole trader? It simply means being self-employed.

Being a sole trader business involves some personal financial risk. Sole traders must pay their debts if their business fails. If you’re thinking of starting up a low-cost business (ie one that is unlikely by its nature to build up big debts), you probably needn’t worry too much.

However, if you’re likely to build up significant business debts, it might be more advisable to have the personal financial protection offered by forming a limited company (ie 'incorporation').

Advantages of becoming a sole trader

Setting up and running a limited company requires slightly more administrative effort than being a sole trader, plus you (or a formation agent) must register your new company at Companies House. Setting up a sole trader is quick, easy and involves no cost, while preparing sole trader accounts can be simpler. Sole traders can employ people and become a limited company (‘incorporate’) later on, should they wish.

Although anyone can become a sole trader, you might need a licence or permit from your local authority for the type of business you plan to set up. Seek advice if you’re unsure.

Becoming a sole trader

You must register your sole trader/self employed business with HM Revenue & Customs (HMRC) as soon as possible – otherwise you could be fined up to 100% of the tax due in addition to the amount of tax unpaid. This is true even if you are only running your sole trader business on a part-time or casual basis.

Many entrepreneurs start their business off on a part-time basis - to test the water or while the business grows sufficiently to generate enough income to support themselves and their families. Some continue working in an employed capacity during these early days so that they have a salary to fall back on. In these cases, it is still necessary to register with HMRC if your employment status indicates that you are self employed for some or all of your work.

The easiest way to register is to use the HMRC Online Service or to call the HMRC ‘Newly Self-Employed Helpline’ on 0300 200 3504. You will need to have: your name; date of birth; address; telephone number; National Insurance number; start date; name and type of business; and whether you’re a sole trader or working with a partner. The process is quick and easy if you have the information to hand.

Alternatively, download and complete the HMRC form ‘Becoming self-employed and registering for National Insurance contributions and/or tax’. It will then need to be sent to the National Insurance Contributions Office.

Use the HMRC e-learning tutorial 'Starting your own business' to help you get to grips with different aspects of the tax system, at your own pace.

Sole trader tax and NI

As a sole trader business, you pay income tax on any 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 National Insurance contributions (NICs) throughout the year (£2.75 a week payable every six months). Setting up a direct debit can make payment more convenient.

If your annual profits exceed £7,956, you’ll also have to pay Class 4 NICs (9% on profits up to £41,865; 11% on annual profits above this figure (rates for 2014/15). You pay this with your income tax and the figure is calculated from your self-assessment tax return. You must keep detailed financial records for your business, as well as proof of any expenses (eg receipts, invoices, utility bills, etc). Both will be invaluable when it’s time to fill in your tax returns each year.

If, as a sole trader business, you employ people, you must collect income tax and NICs from them and pay these to HMRC. You’ll need to operate a PAYE (Pay As You Earn) payroll scheme, too. If you expect to turn over more than £81,000 (2014/15) a year, you must register for VAT, charge it to your customers and pay it to HMRC. If you are VAT-registered, you can reclaim the VAT you pay to your suppliers.

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You can find more detailed advice on taxes for the self employed on the Tax Donut.