There is no simpler way to trade than by setting up as a sole trader. The first step is to register as self-employed with Her Majesty’s Revenue and Customs (HMRC) – this can be done online by filling out a form, and will enable HMRC to send out quarterly bills for you to pay ‘Class […]
There is no simpler way to trade than by setting up as a sole trader. The first step is to register as self-employed with Her Majesty’s Revenue and Customs (HMRC) – this can be done online by filling out a form, and will enable HMRC to send out quarterly bills for you to pay ‘Class 2’ National Insurance, protecting your state pension in the future.
A sole trader must keep all invoices and receipts for business expenses for six years. They must also keep a record of yearly earnings, as well as business expenses. They must complete a Personal Tax Return every year, which declares profit for the year up to 5th April. And they must pay their Self Assessment Tax, as well as their Class 4 National Insurance contributions.
Registering a business name
The business name of a sole trader doesn’t have to be registered in the same way as that of a Limited Company. You can choose any name you like, but if you go on to register as a Limited Company further down the line there will be restrictions to consider. So think about securing your preferred company name early on. Incidentally, registering your company name will give you the credibility of featuring on the Companies House website.
Opening a business bank account
A business bank account isn’t always necessary, but most sole traders do set one up. It’s advisable to keep business and personal finances separated, as this makes it easier to keep track of business funds.
Register for National Insurance
Once you are set up with HMRC, they will send you a quarterly bill for your Class 2 National Insurance contributions. This basic payment covers your state pension requirements, and the other National Insurance payments (Class 4) are calculated when you submit your Self Assessment.
You only need to register for VAT if your company profits hit the £81,000 threshold. There are options when you do register for VAT, so you should discuss this issue with your financial advisor.
Pay your tax bill
As a sole trader, you will need to pay tax twice a year – 31st January and 31st July. Your accountant can advise you on this. At the end of the tax year, if you provide your accountant with figures for expenditure and income, they can calculate your tax liability. A good rule of thumb is to put aside 30% of your earnings to cover tax and National Insurance.
Claims for expenses
In a nutshell, anything your business spends money on is tax deductable.
Insurance for sole traders
You might need to set up public liability and professional indemnity insurance. Another useful insurance would be one to cover lost earnings when you fall ill or become injured and are unable to work. These policies are not as expensive as you might think, and you may be grateful for them!