In this beginners guide to becoming a sole trader, Manchester accountants, Alexander & Co will look at what you will need to consider when diving into self employment and starting your own business.
What is life like as a sole trader?
The initial step
You will need a legal structure for your new business once you have become self employed. This will determine how you pay tax and how you run the business. The majority of people follow the sole trader path as it’s the simplest method to go into business on your own.
Flexibility is a great benefit in life as a sole trader. You can either work part or full time, perhaps even on a casual basis if you still work as an employee elsewhere. It’s a good way to test the waters or nurture your startup until it creates enough income that supports you.
It’s easier to register as a sole trader than it is starting a limited company. There is minimal paperwork, your business details remain private and you can keep the after tax profits.
However, as a sole trade you’re responsible for any business debts. This can mean your savings and possessions, such as your home are at risk from creditors. It may be in your interest, due to the nature of your business to set up a limited company if you’re likely to build up debts to begin with.
Paying tax as a sole trader
Becoming a sole trader also means you pay National Insurance Contributions, as well as the income tax based on your profits. This is accomplished through self assessment tax, which includes submitting an annual form to HMRC. It will calculate how much tax you owe so you can pay the required amount.
Once you become registered as self-employed, you should receive a letter in April for your first self assessment telling you when to complete it. Check your NIC by asking for the statement form.
Employing people as a sole trader
Sole traders don’t have to work solo, but the moment you employ staff you will need to tell HMRC and collect National Insurance and Income tax contributions from your employee’s monthly salary. You will also need to start a PAYE payroll scheme.
How to choose a name for your business
You also need to choose a name for your business. You can choose a specific name or trade under your own name. Do not pick a name that is similar to a company that already exists – you could wind up in a legal dispute. Use websites such as Companies House to check for limited companies that exist with the same name, or simply research online for local businesses with a similar name and make sure you stay clear of them.
How to register as a sole trader?
You need to register within 3 months of becoming self employed. Failure to do so will result in a penalty of £100. This also applies if you are part time. You can call HMRC on their ‘Newly Self Employed Helpline’ or register online.
You can also download the HMRC CWF1 form where you will need to provide HMRC with your:
- National Insurance Number
- Telephone number
- Name, start date and type of business
About the Author
John McCaffery is a partner at Manchester accountancy firm Alexander & Co and specialises in personal and corporate tax.