You’re self-employed if you run your own business as an individual and work for yourself. This is also known as being a ‘sole trader’.
You can keep all your business’s profits after you’ve paid taxes on them. You’re personally responsible for any losses your business makes. You must also follow certain rules for running and naming your business.
When you need to set up?
You need to set up as a sole trader if any of the following apply:
- – you earned more than £1,000 from self-employment between 6 April 2022 and 5 April 2023
- – you need to prove you’re self-employed, for example, to claim Tax-Free Childcare
- – you want to make voluntary Class 2 National Insurance payments to help you qualify for benefits
How to set up as a sole trader
To set up as a sole trader, you need to tell HMRC that you pay tax through Self Assessment. You’ll need to file a tax return every year.
Register for Self Assessment.
Your responsibilities as a self-employed or a sole trader
You’ll need to:
You’ll need to apply for a National Insurance number if you’re moving to the UK to set up a business.
Registering for VAT
You must register for VAT if your turnover is over £85,000. You can register voluntarily if it suits your business, for example, if you sell to other VAT-registered businesses and want to reclaim the VAT.
What to do if you work in the construction industry
Register with HMRC for the Construction Industry Scheme (CIS) if you’re working in the construction industry as a subcontractor or contractor.
Choosing your business name
You can trade under your own name, or you can choose another name for your business. You do not need to register your name.
You must include your name and business name (if you have one) on official paperwork, for example, invoices and letters.
Sole trader names must not:
- – include ‘limited’, ‘Ltd’, ‘limited liability partnership’, ‘LLP’, ‘public limited company’ or ‘plc’
- – be offensive
You need to get permission if your name contains a ‘sensitive’ word or expression, or suggests a connection with government or local authorities. For example, to use ‘Accredited’ in your business name, you need permission from the Department for Business and Trade (DBT).
Check which words you need permission to use, and who from.
If you choose a name or logo that’s registered as a trade mark or is already being used, the owner could take legal action against you.
If you register a trade mark, it’s easier to stop other businesses using your name or logo.
You must keep records of your business income and expenses for your tax return if you’re self-employed as a:
- – sole trader
- – partner in a business partnership
You’ll also need to keep records of your personal income.
If you’re the nominated partner in a partnership, you must also keep records of the partnership.
Accounting methods for self-employed / sole traders
You’ll need to choose an accounting method.
Many businesses use traditional accounting where you record income and expenses by the date you invoiced or were billed.
You invoiced a customer on 28 March 2022. You record that invoice for the 2021 to 2022 tax year – even if you did not receive the money until the next tax year.
Cash basis accounting
Most small businesses with an income of £150,000 or less can use cash basis reporting.
With this method, you only record income or expenses when you receive money or pay a bill. This means you will not need to pay Income Tax on money you have not yet received in your accounting period.
How can MCL Accountants help with your queries on How to set up as self-employed or sole trader?
Contact MCL Accountants on 01702 593 029 if you have any queries on How to set up as self-employed or sole trader or if you need any assistance with the preparation and submission of your business accounts or self-assessment tax returns to HMRC.