Many entrepreneurs find the most appealing aspect of starting a business as a sole trader in the United Kingdom because of its flexibility and freedom. This post will take you through the basic steps of registering a sole proprietorship, followed by the reasons why this model is attractive to a business or company and how it works for you as well.
What is a Sole Trader?
A sole trader is an independent person who owns and operates a business. In this program, you make all the decisions for your business and are personally responsible for the costs. This means that if your business suffers a loss or debt, your personal assets may be at risk. However, this model is preferred by many for its ease of configuration and maintenance.
Benefits of Being a Sole Trader
- Ease of Setup: The process of registering as a sole trader is quick and requires minimal paperwork.
- Full Control: You are in complete control of your business.
- Tax advantages: Your business income is taxed on your personal income tax rate, which can be beneficial depending on your income.
- Low cost: There is no registration fee to set up as a sole trader through HM Revenue and Customs (HMRC).
Steps to Register as a Sole Trader in the UK
1. Notify HMRC
The first requirement for registering as a sole trader is to declare to HMRC that you are self-employed. You can do so by creating or logging into your official gateway account or by submitting forms. It is until October 5, at the end of the tax year in which you started the business.
2. Complete the self-assessment registration
Once you have reported to HMRC, you must complete a registration form for a self-assessment. The self-assessment registration form contains very important information as described below:
- name
- Trade name, if different owner
- address
- Description of the project
- If the number
- Date of Birth
- Contact number
Once the above form has been submitted, HMRC will issue you with a unique taxpayer number which is required for a tax refund.
3. Name your business
If you wish to operate under a name other than your own, you must choose a valid business name. The name cannot use “Limited” or “Limited Liability Partnership 0(LLP)” and cannot be misleading or sentimental. You can use the online company name search engine to check if the name you want is available
4. Open a professional bank account
While not mandatory, it is wise to open a new bank account for your business. This will separate personal and business income and make it easier to account for and file taxes7.
5. Licensing and insurance
Depending on the nature of your business, you may need specific permits or licenses. Additionally, you may need insurance such as civil liability insurance to protect you from potential risks associated with running your business.
Ongoing Responsibilities as a Sole Trader
Once registered, running a business as a sole trader brings with it many responsibilities:
Tax Returns
You need to submit a yearly Self-Assessment tax return reporting your earnings and expenditures. This needs to be submitted before 31 January every year, covering the previous year up to and including April 5.
Record Keeping
Maintaining proper financial records is very important in running your business and meeting tax obligations. You must keep a record of all your income and expenses for at least five years.
National Insurance Contributions
As a sole trader, you will be required to pay Class 2 National Insurance contributions if your profits are over a certain threshold. Contributions qualify you for state benefits and the State Pension.
FAQs About Sole Trader Registration in the UK
What is the difference between a sole trader and a limited company?
A sole trader is an individual who runs their own business and is personally responsible for its debts. In contrast, a limited company is a separate legal entity, meaning the company itself is responsible for its debts, and the owners (shareholders) have limited liability. This distinction affects tax obligations, legal responsibilities, and distribution of profits.
Do I need to register for VAT as a sole trader?
You must register for VAT if your taxable turnover exceeds the VAT threshold, which is currently £85,000 (as of 2024). If your turnover is below this threshold, registration is optional. However, registering for VAT can allow you to reclaim VAT on your business purchases.
What records do I need to keep as a sole trader?
As a sole trader, you should keep detailed records of all income and expenses related to your business. This includes invoices, receipts, bank statements, and any other financial documents. You are required to retain these records for at least five years after the 31 January submission deadline of the relevant tax year.
Can I employ staff as a sole trader?
Yes, as a sole trader, you can employ staff. However, you will need to register as an employer with HMRC and comply with employment laws. This includes paying employees’ wages, deducting income tax and National Insurance contributions through the Pay As You Earn (PAYE) system, and providing necessary employee benefits
Conclusion
Registering as a sole trader in the UK offers numerous advantages, such as simplicity, control, and low costs. By following the outlined steps—informing HMRC, completing the Self-Assessment registration, choosing a business name, setting up a bank account, and considering necessary licenses—you can establish your business effectively.
While operating as a sole trader provides flexibility, it also comes with responsibilities that require careful management. Keeping accurate records and meeting tax obligations will help ensure the success of your new venture.
For more detailed guidance on registering as a sole trader or managing your business finances, consider consulting resources available through HMRC or professional advisors specialising in small businesses in the UK.
