Making the move from employment to self-employment can feel overwhelming, but you’re in good company. There were a reported 3.1 million sole traders in the UK at the beginning of 2022. And these figures are continuing to grow!
We’re going to look at the most frequently asked questions surrounding sole traders. Including:
- What is a sole trader?
- Do I need to register as a sole trader if I’m self-employed?
- When should I register as a sole trader?
- What information do I need to register as a sole trader?
- How do I register for a Government Gateway account?
- What happens once I’ve registered for my Self Assessment?
- What tax do I need to pay as a sole trader?
- Can I claim expenses as a sole trader?
- Can I employ someone as a sole trader?
What is a sole trader?
A sole trader is a self-employed person who runs their business (or businesses) as an individual, rather than as a separate legal entity.
In this sense, being a sole trader means you are the business! There are no shareholders or directors like in a limited company and you don’t share ownership, profits, or liabilities with another individual like in a partnership.
This means you have complete autonomy to run your business how you see fit, and you’ll reap the benefits of keeping all your profits once you’ve paid taxes.
Speaking of taxes, it’s much easier to submit tax returns as a sole trader. This is because HMRC sees you and your business (or businesses) as one entity. So, no matter how many sole trader businesses you may have, you’ll only need to submit one tax return.
If you set up a limited company, you’re seen by HMRC as separate from your business. This means you’ll need to submit a tax return for the income you take out of your business as the director, as well as a Company Tax Return so your business can pay Corporation Tax.
It’s safe to say being a sole trader leaves you with much less paperwork!
Do I need to register as a sole trader if I’m self-employed?
When you become self-employed, you need to think about which business structure works best for you. If you’re setting up a business by yourself, then becoming a sole trader can sometimes be the most popular option based on its simplicity, but it’s not the only option. You can also be self-employed by setting up your own limited company.
There are many benefits to becoming a sole trader, including:
- Being your own boss
- Operating your business is simpler, with fewer reporting and administrative responsibilities (though you will still have some!)
- You get to keep all your profits
While that sounds great, there are also potential disadvantages to being a sole trader. You’ll need to keep in mind things such as your personal liability (meaning the debts of the business are also your personal debts), you’ll also pay tax on your profits when you’re a sole trader, whether or not you take them out of your business.
Take a good look at your options before making any decisions – you might find a different business structure is more useful for your needs.
When should I register as a sole trader?
It’s best practice to register as a sole trader the minute you start trading, and this will help you get into the swing of things!
Technically speaking, you don’t need to register as a sole trader unless the income you earn from self-employment is more than the tax-free trading allowance (which is currently £1,000).
For example, if you’re in full-time employment, but bake cakes on the side, you won’t need to tell HMRC, as long as your self-employed earnings are less than £1,000.
In most cases, it’s easier to register as soon as you start trading to make sure you’re not waiting for confirmation.
What if I need to register for Self Assessment for another reason?
You might need to register for a different reason, such as because you:
- Need to prove you’re self-employed to claim tax-free childcare
- Want to make voluntary Class 2 National Insurance payments (so you can qualify for benefits or the state pension)
- Receive untaxed income from another source, such as dividends, or from property
Registering if you’re not self-employed is a little different, so always check GOV. UK for advice.
What information do I need to register as a sole trader?
You’ll need to provide some basic information about yourself and your business when registering as a sole trader.
- Your full name
- Date of birth
- National Insurance number
- Any previous names you’ve had and the date it was changed (for example your maiden name)
- Contact details including your full address and postcode, phone number, and email address
- The date your business started or when it’ll start
- What sector you’re working in
- The name of your business
- The full address and telephone number of your business
You’ll also be asked how long you’ve been a UK resident or if you’ve moved to the UK in the last 12 months.
Where do I apply?
You can register for Self Assessment using your Government Gateway account.
How do I register for a Government Gateway account?
If you don’t have a Government Gateway account yet, don’t worry it’s easy to sign up!
- Head over to HMRC services
- Click on the green ‘Sign in’ button
- Scroll down to ‘Create sign-in details’
- Enter your email address
- You’ll be sent a confirmation code to verify your email address
- You’ll then be sent your user ID for your Government Gateway account – keep this safe!
You can print your Government Gateway code off or pin the email with the details to the very top of your email account.
You’ll need to use your new Government Gateway account to complete the registration process. Be aware that this step can take longer to complete, so leave yourself plenty of time.
To register for Self Assessment
To complete the registration process for Self Assessment:
- Login to your Government Gateway account
- Follow the options to ‘add a tax’ to your account
- Select ‘Self Assessment’, and choose the correct category, such as sole trader or partnership
- Enter your details as prompted
What happens once I register for Self Assessment?
HMRC will send you your Unique Taxpayer Reference (UTR) number and an activation code to access your account. Always keep your UTR number on hand, as you’ll be quoting this number to HMRC each time you correspond with them.
Once you’re signed up, spend some time having a look around. This will be where you send all your tax returns, so it’s worth getting used to!
What tax do I need to pay as a sole trader?
Sole traders usually pay income tax, and make Class 2 and Class 4 National Insurance contributions, depending on how much you earn. Your tax bill will be worked out once you submit your Self Assessment tax return, but good bookkeeping software (like Pandle!) will show you your tax liability as you go, helping to avoid any nasty surprises.
Just don’t forget about Payments on Account
If your tax bill is over £1,000, HMRC assume you’ll earn the same amount next year, and ask you to make an advance payment on next year’s bill. Known as Payments on Account, you’ll need to pay this year’s bill, and then half of it again as a payment towards the following year.
Can I claim expenses as a sole trader?
Yes, you can – and you should! It’s your responsibility as a sole trader to keep good financial records for your business. This helps you keep an eye on what’s happening in your business, and also means there’s less risk of you forgetting about any allowable business expenses you could claim tax relief on.
Can I employ people as a sole trader?
It’s very common for sole traders to have people working for them. It’s important you grasp the different types of employment first though, so you know if they’re a worker, employee, or contractor. For instance, if you hire an employee you’ll need to register as an employer first and submit PAYE returns to tell HMRC about their pay.
We understand becoming a sole trader can be daunting. If you’re looking to make the move to self-employment, seek professional advice on how to get started. Learn more about how our cloud-based software can help you run your business, and create your free account.