Becoming A Sole Trader
When you operate as a sole trader, you are self-employed and running your business as an individual. There is no legal distinction between the owner and the business compared to a company, so you will be personally responsible for any losses your business makes and paying the bills. If your income is over £1,000 in the tax year 6th April to 5th April, then you must register as self employed and declare your income by submitting a tax return.
Sole traders are required to:
1. Register as self-employed with HMRC and receive a Unique Tax Reference (UTR) number. This should be done by 31st October so that HMRC can issue you with a self-assessment demand in time for the 31st January deadline. You will need a Government Gateway account first to set up an online account by using this link https://www.gov.uk/log-in-register-hmrc-online-services/register. Once you have an online login, then you visit https://www.gov.uk/set-up-sole-trader to register for self assessment.
2. Record all income and expenses. The tax year runs from 6th April to 5th April, so most sole traders use this as their period. You should consider which accounting software to use. We work in partnership with Xero accounting software and can discuss your requirements to help you choose the best option.
3. Submit a Self-Assessment tax return every year by 31st January. There is an automatic late filing penalty of £100 for late submissions.
4. Register for VAT if your turnover will be over the VAT threshold of £85,000 in the next 12 months.
5. Pay Income Tax and Class 2 and Class 4 National Insurance on their taxable profits if over the personal allowance of £12,570.
6. If your taxable profits are between £6,725 and £12,570 (Small Profits Threshold) then you will not pay NIC but will still earn pension credits.
7. If your tax bill exceeds £1,000 then you will pay any tax due, plus make payment on accounts on the expected tax bill for the following tax year. You pay 50% on 31st January and 50% on 31st July.