The easiest way of becoming a business owner in the UK is to register as self-employed. You may also have heard this referred to as being a sole trader.
There is a little paperwork to complete in setting up your self-employment business, but it is by no means extensive. Additionally, you do not need to pay any costs to form a company. However, you must register formally with HM Revenue and Customs (HMRC) as self-employed. This will subsequently mean that you are responsible for paying your National Insurance contributions and income tax yourself. Let us look at the steps you will need to follow to become self-employed.
First things to register as self-employed
First, you need to register with HMRC informing them of your decision to become self-employed. You do not need to register formally as a sole trader straight away. You have until the 5th of October of the second tax year of your business. For information, a tax year always runs between the 6th of April and the 5th of April of the following year.
For example, if your business started in March 2020, the deadline to register as self-employed would be 5th October 2020. On the other hand, if you first worked on a self-employed basis in May 2020, your deadline to register with HMRC would be 5th October 2021.
How to register as self-employed?
There are three ways of registering with HMRC, which are dependent on your circumstances.
Becoming Self-Employed if you have not been self-employed before and have never completed a tax return previously
If you have never been self-employed before or done a self-assessment tax return, you must register your new self-employed business via the HMRC website here. This is a straightforward way of registering for both self-assessment tax and Class 2 NI contributions simultaneously.
Becoming Self-Employed if you have not been self-employed before but have completed a self-assessment tax return previously
If you have not been self-employed before but have completed a self-assessment tax return before (for example, if you have received income that was not taxed, such as from an investment or rent), the process is slightly different. You must register as self-employed and complete the CWF1 Form, registering you for Class 2 NI contributions. In this way, you will use your current or former self-assessment account.
Becoming Self-Employed if you have been registered as self-employed before
If you were once registered as self-employed and need to re-register, you do this with the CWF1 Form.
What’s in a Name when starting your business?
Deciding on a name for your business is an essential part of creating its identity. Quite often, it is one of the exciting tasks that newly self-employed people enjoy. It is necessary to get it right as you will need to use the name on all official paperwork and day-to-day, depending on your business.
Many people trade using their name or with a bit of addition describing the business such as ‘Martin Jones Plumbers’ or ‘Shelly Anderson’s Nails’. What you must do is check whether your chosen business name is already registered somewhere else. There is no register of names, but you should search online to check. This will ensure that you will not mistakenly have any legal claims made against you instead of a similarly or identically named business. It is much better (and safer!) to have a unique name for your business.
When you register as self-employed, HMRC understands that you are responsible for filing your tax return and paying tax and National Insurance owed. Every year you will need to submit HMRC’s self-assessment tax return.
Lots of self-employed people have an accountant to do this for them. An account is usually more skilled in this potentially complicated area and will advise and guide you in the different ways to manage your tax.
One way of doing so is to keep your tax money separate from your income in a different account right from the start. In doing so, you will not need to find any money from anywhere else later when your tax bill arrives. An accountant’s role would therefore aid you in working out how much you should expect to pay so that you set aside the correct amount from your income each month.
Sole traders are also responsible for their National Insurance Contributions payments. Class 2 NIC change in cost each year, but in 2020/21, they start at £3.05 per week, rising depending on the amount earned. If you earn between £9,500 and £50,000, you will also pay 9% of your annual profits in Class 2 NICs as well as £3.05 per week. This becomes 2% of annual profits plus £3.05 per week if you earn over the £50,000 threshold. Because these rules are not simple, it is sensible to follow an accountant’s advice.
What’s VAT all about?
Do you need to register for VAT? VAT registration is essential if your business is likely to have an annual turnover above a certain threshold. In 2020/21, this threshold stands at £85,000. You must know where your turnover is at all times. Once you hit that threshold, you must register for VAT within 30 days. You register for VAT on the government’s website here.
One thing to note is that you can register for VAT at any point. You do not need to wait to cross that £85,000 threshold to be able to register.
Other things to consider when starting a business
If you are setting up as self-employed, you will also need to follow any legalities for your particular field before you begin trading. For some businesses, you need to have a licence before you operate. One such example of this is if you become a taxi driver, which is a licensed profession. Other self-employed jobs must also have specific licences, including market traders or becoming a registered childminder. Many of these licences also require specific qualifications and training too. Your business may need an inspection before it can begin, depending on the business type.
Registering as self-employed is just one way of working for yourself. You can also register as a limited company or as a part of a business partnership. There is more information on these different types of registrations on the government’s website here. We know how challenging starting a business can be. Our commercial solicitors are here to offer you the advice to help you get through some muddy waters, thereby saving you time and energy in the future.
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