Judith Rutherford of Business Link for London offers a step-by-step guide on how to get started.
The first step to becoming a sole trader is to choose a company name.
You can trade under your own name or come up with a suitable business name.
Bear in mind that if you decide to use a business name, you must make sure that your business stationery displays your own name as well as the trading name of the business.
Your trading name should not be the same as, or too similar to, that of a business that already exists, as this can not only cause confusion for your customers but it may also land you in legal hot water.
And be careful that the name does not contain words that people might find offensive or misleading.
Tax matters and VAT
As a sole trader, you will have to pay income tax on any profits your business makes. You must fill in a self-assessment tax return each year, detailing your income and expenses.
Make sure you register as self-employed with HM Revenue & Customs as soon as you start up in business on your own.
If you fail to do this within the first three full months of becoming self-employed, you may have to pay a penalty of £100. You can download a form to register as self-employed from the HM Revenue & Customs website.
If your business has (or you expect it to have) a turnover of more than £60,000 a year, you need to apply for a VAT number, you must charge your customers VAT, complete the relevant VAT returns and send VAT payments to HM Revenue & Customs.
Setting up a business: Sole trader vs limited company
You’ll have to make flat-rate Class 2 National Insurance contributions (NICs) throughout the year (£2.10 a week in 2005/06).
Setting up a monthly direct debit is a good way to ensure you pay in time. If your annual profits are over a certain amount (£4,895 in 2005/06) you will have to pay Class 4 NICs.
You pay these along with your income tax – the amount you have to pay is calculated from your self-assessment tax return.
Contrary to perceived wisdom, sole traders can take on employees just like any other business. If you do, you will need to collect income tax and NICs from them and pay these to HM Revenue & Customs.
You will therefore need to operate a Pay As You Earn (PAYE) payroll system.
Keeping tax records
You must remember to keep all the financial records you will need to fill in your tax returns. It’s a good idea to store all your receipts and transaction records in a safe place and in date order.
The more organised you are with your paperwork from day one, the easier it will be to compile your return when the time comes.
Special licences and permissions
Although anyone can set up in business as a sole trader, for certain types of work you may need a licence or permission from your local authority.
Restaurants, childminders, cab drivers and street traders, for example, all need to have a local authority licence.
In addition, your qualifications and business premises may be inspected beforehand to ensure you comply with certain regulations.
Special tax rules apply to subcontractors in the construction industry. You can find out about tax for construction industry subcontractors on the HM Revenue & Customs website.
You can check that you’re properly set up as a self-employed sole trader by answering these quick questions.
- Registered as self-employed with HM Revenue & Customs?
- Obtained any permits and planning permission that you may need from your local authority?
- Found out from your local authority whether you need to pay business rates?
- Contacted HM Revenue & Customs to register for VAT if you expect to have a turnover of more than £60,000 a year?
- Set up a financial record-keeping system?
- Made sure that your own name is on all your business stationery, including letters, invoices, receipts and cheques?
If you can answer ‘yes’ to all these questions, congratulations – you’re in business as a self-employed sole trader.
Further reading on how to become a sole trader:
- Sole trader or limited company?
- Registering as a limited company – the pros and cons
- Can two people run a sole trader business
- How does temporary residency affect my status as a sole trader?
- Is it possible to set up as a sole trader while still being employed full-time?