Becoming a sole trader is perhaps one of the most straightforward ways to start a business. There are no registration fees to pay, it is easy to keep a close eye on your financial records, and you can make key decisions quickly as you are your own boss.
Whilst becoming a sole trader is relatively easy in business terms, going it alone can be a daunting move for many people. This guide therefore aims to give you a good overview of what will be required of you as you move into the world of business.
Choosing a name
It may seem obvious, but one of the first things you may want to do as you look to become a sole trader is choose a suitable business name. Whatever you decide to call your business, it may be worth considering choosing something which accurately reflects the nature of your business.
You may also want to steer clear of selecting a business name that is similar to those already in existence. This could be crucial in preventing legal headaches in the future if another company believes that you have intentionally adopted its name.
Tax and VAT
The moment you have started trading you may want to make sure you register as self-employed with HMRC.
If you fail to do this within the first three months of becoming self-employed, you could suffer a hefty fine. To register as self-employed, you can either enter your details on the HM Revenue & Customs website or call the ‘Newly Self-employed Helpline’ on 08459154515. There is also a helpful PDF to help you with any queries you may have.
As a sole trader you are liable to pay income tax on any profits that your business makes and you will need to fill out a self-assessment tax return every year. It is therefore important that you keep your records up-to-date and well-organised.
Some sole traders may only run a small operation and will not have to worry about VAT. However, if your business has, or is expected to have, a turnover of over £60,000 a year, you will need to apply for a VAT number. You will then have to charge your customers VAT, complete the appropriate VAT returns, and send VAT payments to HM Revenue and Customs.
Using the self-assessment tax return you submit, HMRC will also calculate any profit-related National Insurance Contributions (NIC’s) that need to be made.
You usually pay 2 types of National Insurance if you’re self-employed:
- Class 2 if your profits are £5,965 or more a year
- Class 4 if your profits are £8,060 or more a year
Class 2 NIC’s for the 2016/2017 tax year, this is £2.80 a week.
Class 4 NIC’s, are payable at 9% on profits between £8,063 and £43,000 (Rate for tax year 2016 to 2017) plus 2% on any profit over that maximum amount.
You do not have to work out the Class 4 NICs amount yourself. If you send in a paper tax return by 31 October following the end of the tax year and leave the space blank, HMRC will work it out for you.
Most people pay Class 2 and Class 4 National Insurance through Self Assessment.
While you start up immediately as a sole trader for most types of business, for some occupations you might require a special licence or local authority permissions. Taxi drivers, childminders and buskers all require a local authority licence before they can start earning.
If you are unsure about whether you require a particular licence or not, you should contact your local council for further advice.
Even as a sole trader you may want to consider taking out business insurance to financially protect yourself and your business in the event of litigation brought about by your business activities.
If you are visiting other premises, or you have people visit your own, you may for example wish to consider purchasing public liability insurance. This could cover you against any damages awarded to members of the public as a result of illness, injury, or damage to their property, which is found lawfully to be as a direct cause of your business operations.
To find out more about running a business please visit our blog. Alternatively, if you would like to receive a business insurance quotation please visit our website.