In this step-by-step guide, I’ll show you when and how to register as a sole trader in the UK. I’ll also answer some FAQs commonly asked as part of the registration process and show you where you can find extra information on things like taxes and Limited Companies. So, if you’re wondering if you should set up as a sole trader, read on to find out more.
Table of Contents
- 1. When to Register as a Sole Trader
- 2. Should I Set Up as a Sole Trader or a Limited Company?
- 3. Information You Need To Have Ready
- 4. How to Register as a Sole Trader Online
- 5. FAQs
1. When to Register as a Sole Trader
You can earn a side income of £1,000 without letting HMRC know and paying tax. We call this the Trading Income Allowance. It’s useful if you are just starting out and want to test whether the sole trader lifestyle is right for you, or if you do a little work on the side. But you should remember, once your income (that’s what you get paid not your profit) goes over £1,000 you must register as a sole trader with HMRC.
Despite this £1,000 allowance, you may also want to register because you have made a loss due to your business expenses exceeding your business income. This lets you record a tax loss that you can use against your future profits to save tax in future tax years.
Whatever your reason for registering, you’ll need to let HMRC know by the 5th October following the end of the tax year you started working for yourself or your income exceed £1,000. So, if you started working for yourself on 1 January 2020, you’ll need to register as a sole trade by 5 October 2020.
There is an automatic penalty of £100 for failing to register, so I would recommend you get registered sooner rather than later so you don’t forget.
2. Should I Set Up as a Sole Trader or a Limited Company?
The right business structure for you will depend on your circumstances. You’ll need to consider who you are working with, what your clients prefer and how much you are earning.
Generally, accountants don’t recommend setting up a Limited Company until you are making profits of £30,000 or more. Below this there is no significant tax savings to offset the fees of using an accountant to handle the additional reporting requirements and tax returns.
Read this guide to Sole Trader v Limited Company to discover the pros and cons of each so you can decide what is the best business structure for you. I’ve also included access to a calculator that you can use to estimate whether you will make a bigger tax saving as a sole trader or Limited Company.
3. Information You Need To Have Ready
Registering with HMRC will be easier if you have the information you need to hand. Here’s what you’ll need:
- Date of Birth
- UK Address
- National Insurance Number
- Telephone number
- Email address
- Business start date
- A brief description of what you do
4. How to Register as a Sole Trader Online
The easiest way to register is to go online and fill out the HMRC application form.
If you’ve already completed a self-assessment tax return form, then you’ll need to fill out a CWF1 to let HMRC know that you have a new form of income. Don’t register again otherwise, HMRC will expect two tax returns from you! You’ll need to find your UTR number and enter it on the form so HMRC can match your sole trader application to your personal Gateway account.
If you have never registered with HMRC or filled out a tax return, then you’ll need to to set you up with an online account so you can then notify them that you are a sole trader. In summary, you’ll need to complete the following steps:
- Visit the HMRC website and choose the option to “Register Online”;
- Set up your HMRC Government Gateway Account so you can manage your taxes online;
- Enrol for self-assessment online;
- Wait for your UTR number to be posted to you (can take up to 10 days), keep this safe, you’ll need it to manage your sole trader tax;
- Wait for your activation code so you can complete setup of your HMRC online account.
Step-By-Step Guide to Setting Up as a UK Sole Trader
- Visit the HMRC website
Head over to the HMRC website and choose the option to “Register Online”
- Set Up a Government Gateway Account
This is the account where you’ll manage all your taxes. HMRC will automatically generate a 12 digit number which you’ll need to user as your login and let you choose a password.
- Enrol for self-assessment
Completing the HMRC form. You’ll need to share your personal details, details about the work you will do once you are set up as a sole trader and make a declaration that everything you have entered it true.
- Wait for HMRC to Review Your Application
HMRC will review your application once you submit it. Within the next 10 days they will send you out a UTR number to be posted to you (can take up to 10 days).
It’s a 10 digit 10 ID number that you’ll need to keep safe in the event you need to prove you are a sole trader, speak with HMRC and manage your sole trader tax.
- Enter Your Activation Code
Finally, you’ll also be sent an activation code for your government gateway account as part of the verification process. It can take up to 28 days for this to be sent but make sure you enter it as soon as you receive it because it will expire.
- What Happens Next
Once registered with HMRC you’ll need to manage your own sole trader taxes which means declaring your income once a year on a tax return and paying any tax you owe twice a year.
Is a Sole Trader a Director?
No, a sole trader is not a Director. They are referred to as sole proprietors, self-employed or freelancers.
Director is only used by people who are officially appointed by a Limited Company.
Do sole traders have company numbers?
There is no register of sole traders or list like the Land Registry, for example. In addition, sole traders are not required to register on Companies House, unless they trade through a Limited Company.
The only evidence a sole trader has is a UTR number. But, this reference number is highly confidential and you shouldn’t share it unless absolutely necessary.
How Long Does It Take to Register as a Sole Trader?
You’ll officially be a sole trader once you have received your UTR number through the post after completing your application on the HMRC website.
Unfortunately, there can be delays with this. So, if you are waiting, you can call the HMRC helpline on 0300 200 3310 to check on the status of your application.
Can you go from sole trader to limited company?
People commonly go from sole trader to Limited Company. You can incorporate your business as any time that is right for you and begin trading through your Limited Company. The HMRC reporting requirements are much more simple for sole traders than Limited Companies, so it can be good to start out as a sole trader to keep things simple in the early days. Then, as your business grows, you can form a Limited Company and pay an accountant to help your deal with the administration as well as structuring your pay in the most tax efficient way.
If you are planning to form a Limited Company in the future, then it can be a good thing to register a dormant company. This means you can save your Limited Company name to use later, with minimal reporting to Companies House and HMRC.
What Tax Do You Pay as a Sole Trader?
Sole traders pay Income Tax and National Insurance (Class 2 and Class 4). The more you earn, the more of each you will pay but can deduct for business expenses, allowances and reliefs. You’ll need to declare your income and expenses to HMRC once a year using a self-assessment tax return form.
You can fill out and submit find the form in the Government Gateway account you just set up. Remember, it’s due by 31 January each year along with your sole trader tax.
How Do You Prove You Are a Sole Trader?
Unfortunately, there is no register of self-employed people. So, how you’ll prove you work for yourself will depend on who is asking. If you are applying for a mortgage, for example, you can provide a form called an SA302 which proves you’ve filed tax returns, how much you earned and the tax you’ve paid.
If a potential client is asking you to prove your employment status, then you could provide your UTR number. However this is a really confidential piece of information so you shouldn’t share it unless you are sure. Also, unless they have specialist software, there is no way for them to confirm what you have given is true. Often sole traders add a note on their invoices confirming that they are self-employed and responsible for their own taxes.