How to register as a Sole Trader

Welcome to the next stage of your career – welcome to the world of the self-employed. One of the first things anyone becoming self-employed on their own has to do is to tell HM Revenue and Customs and, in this article, we’ll tell you everything you need to know about how to register as a sole trader.

First, let’s cover a few basics.

Sole trader – the definition

A sole trader is a self-employed person with complete ownership of the business they set up and run. If you want to share ownership with another person or people, then you would need to set up something called an “unincorporated partnership”. We cover setup and what it is below.

In the eyes of the law, there is no difference between you and your business. You can borrow money to run and grow your business but you are personally responsible for those debts. In other words, you would be liable to repay any unpaid debts you ran up in the course of your business in the event of failure.

Sole trader versus limited company

If you set up a limited company, then that limited company is a separate legal entity to you. That’s important because you are not personally responsible for any debts your limited company incurs unlike as a sole trader.

However, the truth is a little bit more complex than that. While any debts you run up may belong to the company, most lenders will require the shareholders and owners of new and small limited companies to personally guarantee the debt – commonly referred to as a “director’s guarantee”.

Owning and running a limited company requires your accountant to do more work – being a sole trader is cheaper and simpler from a bookkeeping point of view.

Black and White note – you should use an online bookkeeping package like Xero for your financial recordkeeping. It makes it easier for your accountant to claim all allowable expenses possible to reduce your tax liability. In addition, all sole traders should set up a separate business bank account and make sure that you’re strict in using your personal account for personal transactions and your business account for business transactions.

Choosing a business name

Before you register as a sole trader and start trading, the first step you need to take is to consider which trading name you want to use.

You can register your business name under your personal name but many sole traders prefer to trade with a brand new name.

There are limitations on the names you can choose however.

You can’t use “plc”, “public limited company”, “LLP”, “limited liability partnership”, “Ltd”, or “limited”. There are also certain sensitive words you’re not allowed to use – click here for a run-down.

You should also not choose a name which is the same or too similar to an existing trademark.

Unlike with limited companies, you do not have to register the name with Companies House.

Register for Self Assessment

When registering as a sole trader, you also register to receive the Self Assessment tax return form. You can register using this online form at HM Revenue and Customs’ website.

You can also print off the form on the website, fill it in, and send it to the address shown on the form. Alternatively, you can call HMRC direct on 0300 200 3310 for more information.

Navigating the registration process as a sole trader and the subsequent self-assessment tax returns can be simplified with the assistance of a knowledgeable self-assessment accountant. If you have questions or need guidance, consider reaching out for professional support.

What does it cost to register?

There is no cost to registering as a sole trader – it is completely free of charge.

Registering as a sole trader in building and construction

If your business is in the building and construction industry and you intend to be involved in any of the following activities, you must also register for the HMRC Construction Industry Scheme (CIS).

Those activities are alterations, building repairs, building work, cleaning the inside of a building after construction work, decorations, demolition, dismantling, heating, lighting, power, water, and ventilation system installation, laying foundations, providing access works, or site preparation.

You must either register as:

• A contractor (where you sub-contract others to do some or all of the building and construction work);
• A sub-contractor (where you are awarded contracts to carry out building and construction work from a contractor); or
• Both (if applicable).

To register for the HMRC CIS, click here.

What information do you need to register

When you register as a sole trader at HMRC, you’ll need to following information:

• Date of birth;
• Email address;
• Name;
• Name of business;
• National Insurance number (can’t find your NI number – fill in a form CA5403 to find out or call 0300 200 3502 or 0300 200 3519 for text phone users);
• Postal address;
• Start date;
• Telephone number; and
• What type of work you do.

Register as a sole trader – the when

Sole traders must register for Self Assessment as soon as they become self-employed. However, at the very latest, you need to register by the 5 October in your second year as a trader.

For example, if you started trading on 15 April 2021 (tax year 2021-2022), you must register for Self Assessment by 5 October 2022 (tax year 2022-2023). If you register later than this date, you may receive a penalty from HMRC however if you complete and get your Self Assessment tax return in by 31 January 2023 for the tax year 2021-2022 and you pay your tax and National Insurance in full, you will avoid HMRC’s penalty.

What happens next?

As soon as you have registered as a sole trader and for Self Assessment, you’ll hear back from HMRC within 10 days (or up to three weeks if you’re abroad). They’ll send you a letter containing an activation code. You’ll need that activation code to log into your “Government Gateway” account.

HMRC will send you your Unique Taxpayer Reference (UTR) number. You’ll need your Unique Taxpayer Reference number to create your online Self Assessment account as a sole trader with HMRC. You only need to register for Self Assessment once – if you start working as a sole trader and then return to employment and then you wish to start working as a sole trader again, you simply use the same reference UTR number as before. If you’ve lost your reference UTR number, call 0300 200 3310 for HMRC’s Self Assessment helpline.

When you log in to your online Self Assessment portal, you’ll also be able to see information on your current tax status, what your tax code is, how much tax you’ve paid previously, and the dates of your forthcoming tax returns.

As a sole trader, you need to keep accurate and up-to-date records of the money your business earns and the money your business spends. You need to keep your records for up to 5 years in case HMRC wants to check them. The financial information you maintain and update for your business as a sole trader must conform to HMRC’s quality thresholds otherwise you will pay a penalty.

How am I taxed as a sole trader?

If you’re leaving the world of employment to become a sole trader (with no PAYE income coming into your household from anywhere else), you’ll need to report the following on your tax returns:

Profits/income

You’ll need to pay Income Tax on the profits you make. Your profits are defined as the amount of money left over once all allowable expenses have been deducted from the revenue generated by the sales you’ve made.

You don’t pay Income Tax on the first £12,500 of profit you make – this is your personal allowance. You do pay income tax on profits you make above that figure – 20% on the first £37,500 of taxable profit, 40% on the next £100,000, and 45% on any profit above that.

Please note that your Personal Allowance reduces by £1 for every £2 you earn above £100,000.

Class 2 NI

If you make £6,475 profit or more during the tax year, you pay Class 2 NI at £3.05 a week.

Class 4 NI

If you make £9,501 profit or more during the tax year, you pay Class 4 NI at 9% on profits between £9,501 and £50,000 and 2% on profits about £50,000.

Black and White note – please note that Scotland has its own Income Tax and National Insurance system

Capital Gains Tax

You pay tax on any profit you make when you sell business assets including land, building, fixtures, fitting, plant, machinery, and so on. Capital Gains Tax is only payable when you make £12,300 in profit or more during the year.

Do I need to register for VAT as a sole trader?

You need to complete a Value Added Tax (VAT) registration form if your turnover is greater than £85,000 or the point at which you expect your turnover to be £85,000 or more.

You charge VAT on the invoices and sales you make to your customers – this is your “output VAT”. You also pay it on invoices your suppliers send you (if they’re VAT registered) – this is your “input VAT”.

For most sole traders and businesses registered for VAT, you pay VAT once a quarter. To calculate what you need to pay, you subtract the input VAT you’ve incurred from the output VAT over the 3 month period.

VAT is paid via the Making Tax Digital system.

How do I report and pay tax?

The tax year runs from 6 April to 5 April.

Sole traders and other business owners need to complete and return their Self Assessment forms by the 31 January following the end of the previous tax year. You must also pay in full whatever tax you owe by 31 January.

What is payment on account?

Most sole traders pay tax on two dates in the year – 31 January and 31 July. On 31 January, you pay tax on what you accrued in the previous year as well as your first balancing payment.

What happens if I can’t pay my tax?

As long as you inform HRMC that you can’t pay the full amount of tax before 31 January and you have exhausted every other option of finding the money, HMRC may offer you a “time to pay” arrangement.

Can I pay tax monthly?

You can pay your tax in monthly instalments if you owe £30,000 or less in tax, your tax returns are up to date, and you have no “time to pay” arrangements in effect with HMRC.

Coronavirus (COVID 19) information

As part of its response to the Coronavirus (COVID 19) pandemic, the government allowed sole traders and other owners of small businesses to defer their July 2020 Payment on Account until 31 January 2021.

Black and White note – you may also reduce your tax year 20-21 payment on account to preserve cash if your trading profits and cash flow have been affected by COVID 19. Please get in touch to ask us for more information.

Should I use an accountant?

Want to trade for yourself but not sure whether your new business needs an accountant? Becoming a self-employed sole trader for the first time is exciting and, when you make a success of it, you’ll derive a great deal of personal satisfaction from it and you’ll create for yourself a stable, reliable, and generous income.

Running a business is not easy – let us take away the responsibility from you for financial recordkeeping and keeping the taxman happy. In addition to make sure that your small business accounting is accurate and up-to-date, we’re also your business partner – give us a call with any finance- or business-related question and we’ll do our very best to help you.

Black and White Accounting “getting started” checklist

To get started as a sole trader, follow the Black and White Accounting plan below:

• Create and fine tune your business plan – how much cash will you need, what level of profits do you need to make, what expenses will you incur when you make a sale, how much do you and your family need to earn every year, strategies to mitigate the level of risk you’re taking, and more (contact us for more information on drawing up a business plan);
• Decide on a name for your business;
• Set up a separate business bank account;
• Gather up all the information you’ll need in one place to register as a sole trader;
• Register as a sole trader (self-employed) at HMRC as soon as possible so that they know you’re self-employed and so that you’ll receive a Self Assessment form;
• If necessary, register with the CIS;
• Appoint an accountant as your tax agent;
• Use your online bookkeeping software on a daily basis so that your accountant has everything they need for your tax returns and so that they can deduct all allowable expenses to reduce the amount of tax you pay;
• Go out and find customers; and
• Consult with your accountant regularly so that you can keep more of the money you earn and reduce your level of risk.

Sole trader accounting at Black And White

Sole traders must let HMRC know when they’ve started their business but being a successful sole trader is a lot more challenging and you need professionals by your side to protect you and your new business.

We’ve helped hundreds of sole traders not only launch their new business, but also what they need to do to increase their level of income and profits and how to build a business which provides them and their families with the financial security they need now and in the years to come.

To find out more, please get in touch with us today, by contacting Black and White Chartered Certified Accountants, populating the “Got a Question” form on the right, or calling us on 0800 140 464.

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