Setting up as a sole trader, or freelancer, is by far the easiest and quickest way to start a business. It’s fairly light on paperwork and doesn’t require paying a registration fee, however it’s paramount that you register as self-employed within three months of working or starting to trade. Failure to do so may result in a penalty of up to £100, plus interest on any taxes due. Read our step-by-step guide on how to register as a self-employed sole trader. (For advice on registering a limited company, click here).
Pretty much anyone can set up as a sole trader, although there are certain types of work that require obtaining a licence or permit from your local authority, such as childminding, taxi driving or street trading.
If you’re planning on running your business from home, you may have to pay business rates for the part of your home that you use for business purposes, depending on whether or not you use that part for domestic purposes as well. For example, if you work from a computer in your bedroom it is unlikely you’ll have to pay business rates, but if you work from a separate office, this may entail paying business rates.
Another thing to bear in mind if you’re working from home is whether or not you need planning permission. If you propose to make any changes to your house for business purposes, such as building an extension, or if you’re likely to cause disturbance to your neighbours, it will probably be necessary to get planning permission. Contact the planning department of your local authority for more details.
Anyone who becomes self-employed must register for income tax and national insurance contributions with HM Revenue & Customs (HMRC). This can be done either online, by phone or by post, however it is far quicker and more convenient to sign-up online. When registering you will need to provide your national insurance number - if you don’t have one, contact Jobcentre Plus.
While it is not possible to register in advance, it is important that you inform HMRC as soon as you start working. Upon registration, you’ll need to provide the following information:
As a self-employed sole trader, you’ll have to complete a self assessment tax return to HMRC. This involves filling in a tax return form, either online or paper, in which you inform HMRC of your income and capital gains, or in which you may claim tax allowances or reliefs. Usually, HMRC will send you your self assessment tax return in April. However, if yours doesn’t arrive by the end of April, contact your tax office.
If this is the first tax return you’ve completed, you’ll need to fill in a self assessment registration form first. Make sure you have your National Insurance number to hand when doing this. This involves completing a CWF1 form to inform HMRC about your business, and this will also register you for self assessment. If you’re not self-employed, you’ll need to complete an SA1 form.
Once this is done, HMRC will set up tax records for you and will send you a Unique Taxpayer Reference (UTR).
If you owe any money by the end of the tax year (April), you must pay that amount by January 31 the following year. The payment deadline is the same whether you file online or on paper. You will need to pay one or both of the following:
You should receive a self assessment statement that shows the amount due, however if you don’t receive this before payment is due, you’ll need to work out the tax due yourself by registering for self assessment online and using the ‘view account’ option.
If you’re asked to make payments on account, your deadline for making your second payment is July 31.
If you expect to have a turnover of more than £73,000 a year, VAT is applied to your earnings, which also involves contacting HMRC. To register for VAT you’ll need to fill in one or more forms, depending on your business’ circumstances, and then submit them to HMRC. Most businesses only have to complete one form, with the exception of partnerships and groups of companies.
To apply for basic UK VAT registration, download and complete the form VAT 1 from HMRC. If you’re registering a partnership you’ll also be required to fill in VAT 2, although this is not as yet available to complete online.
If you’re planning on doing business internationally, you can download the form to register for VAT for acquisitions, although this cannot be completed online, and so must be sent by post to HMRC.
It is important that you set up a financial record-keeping system, which includes maintaining all records that show your business income and expenses. This is vital for tax purposes but is also beneficial to help you stay on top of your finances.
Business records you need to keep:
In general, you must keep the following VAT records:
In general, you should retain all your business records that are relevant for VAT for at least six years. As long as your VAT records meet the requirements laid down by HMRC, you may keep them in whatever format you prefer (paper and/or electronic).
If your business is in the construction industry, you must retain sufficient business and accounting records to support your Construction Industry Scheme Return. You must tell HMRC each month about all the payments you’ve made to your subcontractors within the scheme by making a monthly return, either by paper or online.
You’ll need to keep the following details:
You should retain your records for at least three years after the end of the tax year that they’re for. You’ll be required to make them available, should HMRC ask to see them.
If you're self-employed you must pay Class 2 and Class 4 National Insurance (NI) contributions. Class 2 NI contributions are paid at a flat rate of £2.50 a week, while Class 4 NI contributions are paid as a percentage of your annual taxable profits, which is 9% on profits between £7,225 and £42,475 (for tax year 2011-2012), and a further 2% on profits over that amount. However, if your profits are expected to be less than £5,315 per year you may not have to pay Class 2 NI contributions. Class 2 NI contributions can be paid either monthly by direct debit or by quarterly bill. You will pay Class 4 NI contributions when you pay your income tax.
All this may seem quite daunting at first, but if managed properly it’s really not as overwhelming as it seems. The best thing you can do is stay organised, maintain your paperwork and flag up any tax or self-assessment deadlines in your diary well in advance so you have adequate time to prepare for them.