How to register as a sole trader

Naming your sole trader business

When it comes to the name of your business you can register under your own name and can pick a name to operate under.

It’s only a limited company that should be very careful when picking a name to trade under. You will still need to be cautious of existing names under the registered trademark.

Other rules you need to be aware of when choosing a name for your sole trader business

A business name must not include offensive things. Your sole trading name can contain a sensitive word such as ’chartered’ or ’charity’ if your business is none of those things. A sole trading name should not have suffixes like LTD or PLC as they don’t represent the structure of your business. Official documents for your business like letters and invoices should carry the name you registered under and a trading name if it exists. Deciding on having a trading name makes it easy for you when you’re a sole trader with several businesses.

Do you even need to register as a sole trader?

If you have started a very small sole trader business which might be a side hustle or hobby you don’t have to register.

If your self-employment income is below £1,000 you’re protected under the Trading Allowance so you won’t need to register with HMRC.

By keeping your income records you can see whether you’re above or below the threshold. If you have started to trade but have not registered yet you are allowed to continue until your business’s second tax year on 5 October. Going beyond this time limit can incur a fine if you don’t send a Self Assessment tax return and settle your bill on time.

Registering with HMRC

Since you’re a sole trader you won’t need to register with Companies House like it is the case with a limited company, but you are obligated to inform HMRC that you’re self-employed and will be submitting your tax returns under Self Assessment.

Registering as a sole trader can be done online or by sending a completed CWF1 form and the records of your online registration account details should be kept. The necessary records to keep include a Gateway ID and the email address you have used, these are the same details you will use to sign in for tax return submission.

Your Unique Taxpayer Reference (UTR)

10 days after your registration is completed, HMRC will send you a post carrying your Unique Taxpayer Reference (UTR) but if you registered online, you will receive a post carrying the activation code to your online account to make certain that you gave them a genuine address.

Your Unique Taxpayer Reference is proof that you’re an operating sole trader and can be used to register for other business services.

Key tax dates for sole traders

A sole trader must keep these important dates in mind:

• The 6th of April is the beginning of the tax year.
• 5th April of the following year is the end of the tax year.
• 5 October is the deadline for Self Assessment registration.
• Midnight of 31st October is the deadline for returning self-assessment tax through post.

31 January and 31 July are key sole trader tax dates

The deadline for tax balancing payments is 31st January at midnight while 31 July is the deadline for payment on account.

How do sole traders pay tax?

You have to pay income tax every financial year based on the profits your business has made. You are required to register for Self Assessment with HMRC and send your Self Assessment tax every year showing details of your income and expenses towards your business. A flat-rate Class 2 NICs must be made throughout the whole year.

How much tax does a sole trader pay?

The success of your business lies in understanding your legal requirements when it comes to paying tax. A sole trader tax requirements are to:

• Pay tax on profits realised from the business without adding the cost of expenses.
• Pay class 2 of National Insurance flat rate of £3.45 per week if your business is getting more than £6,725.
• Pay class 4 of National Insurance if your annual taxable profits exceed £12,570.
• Pay income tax on all business profits that are taxable.

Your financial year and the tax year

Understanding the dates of an accounting year is not easy and can leave you questions and doubts on whether you’re breaking the law or not.

If you decide to start your business on 1st October, the same month for submitting the Self Assessment return it can be a bit problematic to do the maths but if your first financial year starts from the day you start operating it can be a bit easy.

When do I need to submit my first tax return?

Your first tax return must be submitted after the end of a tax year which runs from 6th April to 5th April of the next year. HMRC will automatically send you a self-assessment notice and these can be handled online giving you extra 3 months to complete and submit.

You must submit all your returns and any income owed before these deadlines:

• 31 October: paper tax returns after the end of the tax year.
• 31 January: online tax returns.
• 31 January (after the end of the tax year): any owed tax.

How to register for vat as a sole trader?

You can register for VAT online with HMRC which will give you a Government Gateway online account that you will use when submitting your Value Added Tax returns. A formal registration certificate must be submitted to your online account within 30 working days once the registration is approved. Don’t forget to check your responsibilities.

Don’t forget to check your responsibilities. Even though you’re free to trade now that you’re a registered sole trader, keep in mind the new responsibilities and legal requirements for sole traders. You can be fined for not registering with HMRC With 5 October as a designated deadline for Self Assessment registration, every sole trader is mandated to register as soon as they start their business before the end of a second tax year. A tax year is between 6 April and 5 April of the following year. If you register after these dates you will be subject to a fine. Sole traders must also keep detailed financial records. Accurate financial records indicating how much you’re investing in the business and how much you’re earning from it should be kept once you start trading. These records can include payment receipts, utility bills and invoices. HMRC will want to know how much profit you have made by the end of the financial year through your Self Assessment tax return so keeping track of your income details can help you. 20% of your profits will go to tax and you’re obliged to contribute towards National Insurance.

How long does registration take?

TIf you register with accounting companies the job can be done the same day but if you register directly with HMRC it takes about 10 days. You will need a government gateway account and wait for 10 days to receive an activation code to finish your registration.

When the process is complete, you will wait for about 10 days for HMRC to send you a UTR which acts as a confirmation that you’re now a registered sole trader.

How do I update these details if they change?

You will need to inform HMRC of any changes by:

• Calling on 0330 088 6686 .
• Fill changed details form online.

What expenses can you claim back as a sole trader?

If you charge VAT for your goods and services to customers, you can make a claim for any goods and services bought for your business. You can also reclaim Value Added Tax paid four years back on goods that you bought for your business and are still using. For services, the limit is six months. Any claim will have to be backed up with valid receipts and invoices.

If you opened a separate business account you can claim relief on interest and charges from the account but you will only receive tax relief for complete expenses spent or incurred from the business.

What accounts do sole traders need to keep?

Keep a tax fund bank account and deposit money every month. It can come in handy when you want to settle your bills with HMRC so you don’t get penalised for missing deadlines. Taking 25% out of your earnings and keeping in this account or another separate account can save you on a hard day.

Do sole traders need a dedicated bank account?

A dedicated business bank account is not a legal requirement for sole traders through having separate accounts for you and the business can make financing issues easier more importantly if you have other sources of income apart from the business. To open a separate account you will need to register as a sole trader first. You can benefit from free banking services offered between 12 to 18 months by most banks to newly opened business accounts.

As a sole trader, you have to be good with money and your accounting books as you remain personally liable for any debts associated with the business.

Do sole traders need an accountant?

If your sole trader with a small business that is growing and keeping simple financial records is not making sense anymore, it’s good to get a professional to do your accounting. Having a professional accountant though is not a legal obligation. But with time the paperwork might be too much to manage and taking away your focus from the business so an accountant might be helpful.

An accountant can also help with your budgeting and cash flow, identify opportunities where the business can save money and help you with pricing.

Is Sole Trader the same as self-employed?

The two words are often used interchangeably to describe the ownership of a business and the structure of the business. A sole trader is self-employed and owns the business they are employed in, while a self-employed person can in certain instances not be a sole trader. They can decide to have a business partnership or form a limited company as a business structure and will be employed by themselves though they don’t have sole ownership of the business.

Can I be employed and a sole trader?

Yes. You can even have a full-time job and be a sole trader. It’s common for people doing freelancing or those with a hobby to register as sole traders while maintaining another paying job.

You will continue to receive all your employment benefits and pay normal tax but will be required to send a Self Assessment tax return at the end of the financial year.

Can you register online to be a sole trader?

Registering for a sole trader can be done online and is very quick. You can visit the HMRC online and complete a registration form. After that HMRC will send you a 10-digit Unique Taxpayer Reference UTR by letter and set up your online account for Self Assessment.

But if you already have a UTR because you have previously filed a tax return online, you will be required to re-register using the CFW1 form.