18th April 2023
Have you been sitting on an idea for a while and decided to go for it this time? Or perhaps you’ve had some success and already made over £1,000? Well, it is probably time to look into making your business a reality and start registering as a sole trader.
What is a sole trader?
Let’s have a look at what a sole trader is first. In short, we call a self-employed individual a sole trader who generates income from an entirely self-owned business venture. This individual is solely responsible for the debts and liabilities of that business. This is contrary to other forms of business where liabilities are “limited” and where the individual and the business are separate legal entities.
Why become a sole trader?
If your side hustle or hobby is becoming more than just that, you may want to create a brand and establish yourself, have a website your customers can visit, and a logo to be recognised by. We’ll talk about these later in this article.
When must you register?
Current rules say that anyone earning over £1,000 from a business activity must register with HMRC and declare that income on a self-assessment return.
Is self-employment for you?
We are all different, and some of us are better suited to a structured employment environment, while others thrive in having the freedom to manage their own time. Having your own business requires self-discipline and a lot of self-motivation to keep it running.
Remember, being self-employed means that you are responsible for generating income that pays your bills, so there is not really any room to take it easy. Especially initially, you might find yourself working weekends and skipping holidays to achieve your goals.
What are the benefits of being a sole trader?
It’s cost-effective. When testing the waters to see if you are cut out to be self-employed or if your idea is feasible, you will be watching your wallet. Being a sole trader comes with minimal costs and commitment compared to running a limited company.
You may feel passionate about your hobby and want to see if you can do it as your main job. Perfect, start small, maybe on evenings or weekends and see how it grows. You may end up a proud owner of your own brand and have an impact in your area of interest.
How to get started
First, you need to tell HMRC that you will pay tax through a self-assessment return. The online application is pretty straightforward. You can find the essential links on the Government’s site here.
Choosing a name is quite individual. You can use your own name or a name you will be trading under. All you need to make sure that it is not the same as any existing trademark or has words such as ‘Limited’, ‘LLP’, or ‘PLC’.
Although sole traders are not legally required to open a separate business account, we recommend having one to keep personal and business finances separate. It will make your (and your accountant’s) life a lot easier, not having to sift through your personal transactions to pick out what you spent on your business.
Some banks, like RBS, NatWest or Mettle, will let you use FreeAgent’s online accounting software for free, so why not take advantage?
Brand & Logo
You will probably want to give your business a personality by creating a brand with your own colour scheme, logo and stationery. You can have a go at this yourself using online design software like Canva, which provides many templates to help you get started. Other options may be to look up a designer on Fiverr or search Google for a more convenient option for hiring a professional.
Nowadays, creating a website is made extremely easy with online website builders like Wix or Squarespace. They have thousands of templates to choose from, and if you like one of them, all you have to do is replace the text. You can build your own as well, of course. These can save you a ton, as building a website can cost thousands of pounds.
Not a clue about marketing? Not to worry, there are loads of free courses on how to get to grips with marketing your business on and offline. Have a look at Google’s free Marketing Fundamentals course. It’s not only essential knowledge for a small business owner but can also save you from hiring someone at these early stages.
Responsibilities and the dry stuff (taxes and admin)
As mentioned before, when you are a sole trader, you must declare your income through your self-assessment return. In it, there is a section for each of your income sources, including your self-employment. Now, this can get complicated, so we recommend talking to a professional to help you with this, as they can not only save you tax but also utilise tax rebates where applicable.
After completing the tax return, the tax amount will be calculated automatically at the end. The current income tax rate is 20% and 40% for those with taxable income over £50,270.
Along with income tax, you need to pay National Insurance as well. There are two types of NI, Class 2 (if your profits are £6,725 or more a year) and 4 (if your profits are £12,570 or more a year).
The 2023/24 rates are as follows:
Class 2: Nil on profits between £6,725 and £12,570 and 3.45% on profits over £12,570
Class 4: 9% on profits between £12,570 and £50,270 plus 2% on profits over £50,270
Just like your tax amount, NI is also calculated while filling in your tax return.
Registering for VAT is only compulsory once your turnover exceeds £85,000 in a year. However, you have the option to register voluntarily. Deciding whether to do so will depend on the nature of your business. You will more likely benefit if you are a reseller of goods rather than a content writer.
If you are unsure how VAT works, check out our guide, and it may be worth asking an accountant as well.
Ok, so this is important for your sanity. Keeping your records organised will make your life easy come the time to complete your tax return. You can use a spreadsheet, or even better, choose one of the many cloud accounting software out there.
We at MyAccountant use FreeAgent’s brilliant accounting software to work with our clients. Typically these applications allow automatic downloads of your bank account, expense scanning, VAT returns submissions and many more features to make your business admin a breeze. Also, important to note that HMRC requires you to keep business records for six years.
We mentioned briefly above that as a sole trader; you are personally liable for any debts, damages, or losses that your business faces. That means your personal assets may be at risk, so we strongly recommend looking into insuring yourself.
Professional Indemnity insurance will protect you against a possible claim arising from an error or mistake that causes your customer financial loss.
If your business involves a third party (public), you may want to cover yourself against any claims of property damage or personal injury claims by taking out Public Liability insurance.
HMRC may investigate your tax affairs which could pose quite a financial risk to you as a fully liable sole trader. Of course, having a good accountant will limit the risk of any wrongdoing, but the responsibility ultimately lies with you. A Tax Enquiry insurance may be something you want to look into at some point.
Hiring an accountant
In the beginning, you may have only a few transactions, so it is perfectly possible to do your bookkeeping to save some money. When it comes to the tax return, we encourage you to talk to a professional as they may be able to save you more tax than their actual fees.
Hopefully, after a while, when business picks up, you may face complicated queries, lots of transactions or a lack of time you can allocate to doing your business admin.
This may be when you start looking for the assistance of an accountant. It is important that you engage with an accountant that is a good fit for your business and communicates effectively.
How can MyAccountant help?
We can help with everything you read about above, from registering you as self-employed to VAT registrations, business accounts, and many more, including discounts on business insurance from our friends at Qdos and, of course, expert accounting advice.
If you are interested, why not call us on 0800 917 9100 or e-mail firstname.lastname@example.org for a non-obligatory chat about what you may need help with.
We hope this guide helped answer some of your questions. For more helpful articles, please visit the guide section of your website and to get notified when we publish the latest ones, please follow us on LinkedIn, Facebook or Twitter.