To be classed as a sole trader, you need to run your own business as an individual and be classed as self-employed. As a sole trader, you can keep all the profits your business makes, once you’ve paid tax on them, but you’re also legally liable for any losses your business makes.
To set yourself up as a sole trader you must:
Have earned more than £1,000 from self-employment in the last tax year
Be able to prove you’re self-employed
Want to make voluntary Class 2 National Insurance payments to help you qualify for benefits
Being self-employed
Not sure if you’re self-employed? Ask yourself these questions and if you answer yes to some of them, then you may be classed as self-employed.
Do you run your own business and take responsibility for its success?
Do you have a number of different customers at the same time?
Do you decide how, when and where you work?
Do you provide your own equipment?
Do you charge an agreed fixed price (between you and the customer) for your work?
Do you sell goods or services to make a profit?
Still not sure? Some of the above also apply to limited companies, but in that case, you’re seen as the owner and employee of the company rather than self-employed. Try HMRC’s self-employment status checker to know for sure.
Setting up as a sole trader
Now that you know setting up as a sole trader is the right thing for you, you’re going to need to go through the next 3 steps.
Choose the name you wish to trade under
Get to grips with the records you need to keep
Register for tax
Choose the name you want to trade under
Finding the right name can often be one of the hardest things when setting up a new business. You want to make sure it’s just right. There are a few things that you should keep in mind when choosing the right name as a sole trader.
When choosing a business name for a sole trader you must not include ‘limited’, ‘ltd’, ‘limited liability partnership’, ‘LLP’, ‘Public limited company’ or ‘plc’. You also need to make sure the name is not offensive and isn’t the same as any existing trademarks.
You can check the list of existing trademarks here.
As a sole trader, you’re not required to register your business name, however, you must include your name and business name on things such as invoices. If you don’t want anyone else to use the same name, you should register it as a trademark.
Get to grips with the records you need to keep
Running your own business means that you are responsible for looking after records and expenses so that you can file a tax return with HMRC each tax year. You’ll also need to register for a self-assessment.
The main things you’re going to need to do:
Keep a record of business sales and expenses
Return a self-assessment tax return to HMRC each year
Pay income tax on your profits and Class 2 and Class 4 National Insurance
Class 2 needs to be paid if your profits are over £6,475 a year and Class 4 if your profits are £9,501 or more a year. To find out more about these types of National Insurance and the rates you have to pay, click here.
Register your business for tax
As a sole trader, you need to apply to pay tax to HMRC via self-assessment. It’s quick and easy to set up via the HMRC website. All you have to do is fill in a few details and it will send you a letter containing a 10-digit Unique Taxpayer Reference and set up your account for the online self-assessment service.
Once you’ve registered, you should receive a letter within around 10 working days that has an activation code to finish setting up your online account.
You can also fill in a form and post it to HMRC, but this can take a little longer.
Have you registered for VAT? You’ll need to if your annual turnover is over £85,000. To find out more about VAT for business, check out our other blog.
If you’re moving to the UK to start your business, you‘ll need to apply for a National Insurance number as well, so that you can pay for the different class of insurance outlined above.
If your business falls into the construction industry, you also need to register with HMRC for the Construction Industry Scheme (CIS). You can find out more about how to do that here.
Setting up a business account
Juggling personal and business finances can get tricky as a sole trader so it’s often best to set up a separate business account.
With your Mettle account, you’ll have received a UK account number and sort code. And once you’re up and running, you can create and send customised invoices and connect to accounting software to help keep track of your books. It also comes with an in-app chat feature so that you can speak to real people when you need help.
