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United Kingdom: How to Set-Up as a Sole Trader

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July 28, 2020
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In the U.K., self-employed professionals are also called sole traders because they are individual service providers. Aside from this one, other business structures in the U.K. allow you to work for yourself, such as the limited company or being a partner in a business partnership. Still, this article will be focusing on sole traders only.

The following article will guide through the process of setting up as a self-employed professional in the United Kingdom.

Please bear in mind that this article doesn't substitute legal advice. Information in this article was collected from the British government's official website and other online resources. Please always check official websites or seek legal advice before you take action.

Setting up as a sole trader according to British Law

Setting up as a sole trader is one of the simple business structures at your disposal if you want to run your own business as an individual.

As a sole trader, you are self-employed, responsible for paying tax on your business's profits, and personally responsible for any losses your business makes. Furthermore, being a sole trader allows you to decide what work you want to do, how you want to do it, and when you want to do it. The main advantage is that it covers an array for business services, such as being a self-employed electrician, a freelance writer, software engineer, or something else.

However, this also means that a sole trader isn't entitled to the traditional employees' benefits such as sick pay or holidays pay. As a sole trader, you would be the trading entity so you should always have an eye on the contracts you sign and what they bind you to because you are personally liable for everything and this unlimited liability can represent a significant challenge. You are therefore personally liable for your business's debts and your personal assets may be at risk if you can't pay.

If you meet any of these conditions, you're able to set up and register as a sole trader:

  • You have earned more than £1,000 from self-employment during the previous tax year
  • You need proof of self-employment to claim for some benefits
  • You want to make voluntary Class 2 National Insurance payments to help you qualify for benefits (see below the explanations on what is the National Insurance and how to register).

Registration for Self Assessment

As a sole trader, you will have to inform H.M. Revenue and Customs (HMRC) that you pay tax through Self Assessment. This step is necessary as you will claim that you are earning income as a self-employed professional.

Where and when do you need to register?

You can register online for Self Assessment with HMRC at no cost.

Be careful about the fact that you need to register for Self Assessment by the 5th of October in the second year after starting your business operations in your business's second tax year (at the latest!). For instance, if you started working as a sole trader between April 2019 to April 2020, it means that you should register before the 5th of October 2020. We advise you to register as soon as you can after starting your business.

N.B: The tax year in the U.K. runs from the 6th of April one year until the 5th of April the following year.

What is the registration process?

The process depends on your circumstances:

You didn't send a tax return in the past (as a new sole trader)

You will have, therefore, the duty to register for Self Assessment and Class 2 National Insurance (see below the explanations on the National Insurance) at the same time.

You have already sent a tax return online (maybe as an individual, for example)

  • You need to re-register now as a sole trader and for Class 2 National Insurance, online with the CWF1 form.
  • You'll need your 10-digit Unique Taxpayer Reference (UTR) from your previous registration. You can find your UTR on your previous tax returns, documents from HMRC, or on your HMRC online account, for instance.

You haven't sent a tax return online before

In this case, you will need to register online. You can also print this form and then send it by post to HMRC. Then, HMRC will send you a letter with your Unique Taxpayer Reference (a 10-digit UTR) and set up your online account.

The registration process can take 10 business days. If you are filing for registration from abroad, it takes 21 days.

National Insurance

In the U.K., National Insurance is a contributions system which allows people to qualify for some state benefits, such as the State Pension. It's called National Insurance Contributions (N.I.C.). The contributions are paid by employers, employees, as well as self-employed workers.

As a sole trader, you need to pay mandatory National Insurance if you are 16 or over and if you are working as a self-employed, making a profit of £6,365 or more a year.

The National Insurance is organized in "classes". As a self-employed, you are liable for either Class 2 or Class 4:

  • Class 2 if you earn more than £6,475 a year. If you're making less than this, you can choose to pay voluntary contributions to fill or avoid gaps in your National Insurance record.
  • Class 4 if you earn profits over £9,501 a year.

Bear in mind that you need to deduct your expenses from your self-employed income to work out your profits.

You can budget your Self Assessment tax bill with the HMRC self-employed ready reckoner.

National Insurance Number

A National Insurance Number is needed for being able to pay National Insurance Contributions.

Again, it depends on individual circumstances:

  • If you are a U.K. resident, you should have received an N.I. number (and N.I. card) before you turned 16. You can find it on your payslip, on your P60, on the letters about your tax, pension or benefits, as well as in the National Insurance section of your personal tax account.
  • If you don't have an N.I., you can apply to get it. If you are moving to the U.K., you may have a National Insurance Number printed on the back of your biometric residence permit.

Paying taxes as a sole trader

Tax Returns

Once you are registered for Self Assessment, you will have to file a Self Assessment tax return every year and pay tax on your earnings.

You must send a tax return if, in the last tax year (the 6th of April to the 5th of April), you were self-employed as a sole trader and earned more than £1,000.

Tax returns can be filed in paper form, in which case the HMRC must receive it by the 31st of October following the end of the tax year. For your convenience, you can file your tax return online, in which case the HMRC must receive it by the 31st of January following the end of the tax year. The deadline for paying the Self Assessment tax bill is the 31st of January as well.

Be careful: you can get a penalty if you miss the tax filing deadline. If your tax return is up to 3 months late, the amount of the penalty is £100. If it's later, the amount of the penalty can grow, even though you can appeal against a potential penalty you have received, provided you have a reasonable excuse. Check the U.K. official website to see what can be considered as a reasonable excuse.

Your profits will be taxed as any other income by HMRC. The amount of income tax to be paid depends on how much of your income is above the Personal Allowance and how much falls within each tax band. Check the official website to see more about the income tax rates and bands.

Payments on account

Once you pay tax and National Insurance via Self Assessment, you may need to start advance payments towards your tax bill, called "payments on account". You will have to make two payments on account every year.

Be careful, as you don't need to make these if:

  • Your last Self Assessment tax bill was less than $1,000
  • You have already paid more than 80% of all the tax you owe

Accounts

As a sole trader, you must keep accounting records that follow standard accounting practices, giving a true and fair picture of your business.

Choosing a name for your business

You need to choose a name for your business (it can be your own name or another one), but you don't need to register it.

However, even if you are not required to register your business name, you must include the chosen name on all official paperwork (i.e. letters, invoices).

If you opt for having a business name (instead of operating under your own), there are some rules you need to keep in mind the chosen name:

  • You cannot add "limited", "Ltd", "limited liability partnership", "LLP", "public limited company" or "plc" to it.
  • The name cannot be offensive
  • The name cannot suggest a connection with authorities or government and doesn't contain a sensitive word or expression (unless with permission). You can check which words you need permission for here.
  • The name isn't an existing trademark. You can check if your business name is available here.

V.A.T.

Now that you are set up, you are also required to register for V.A.T. if your turnover is over £85,000.

You can also register for V.A.T. deliberately if it suits your business.

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