Set up and register as self-employed
Setting up as a self-employed sole trader is the simplest and quickest way to start a one-person business. There isn't much paperwork to do. There are no registration fees to pay, but you must register as self-employed. Record keeping and accounting is straightforward, and there are the benefits of being your own boss. This guide explains the consequences - and the legal requirements - of setting up as a sole trader. You will also find out how to meet your responsibilities for paying your own tax and National Insurance. Finally, our checklist will help you make sure that you have put your business on a proper legal footing.
Before you start
Anyone can set up in business as a sole trader, although for certain types of work you may need a licence or permission from your local authority. Restaurants, childminders, cab drivers and street traders, for example, all need to have a local authority licence. Your qualifications and business premises may be inspected beforehand to ensure you comply with regulations.
Working from home
If you run a business from home, you may have to pay business rates for the part of your home that you use for your business. This mainly depends on whether the business area of your home is also used for domestic purposes. If you simply work on a computer in a bedroom, for example, you will probably not have to pay business rates. You may need to get planning permission to set up a business at home. For example, if your business could cause a nuisance to your neighbours, or if you intend to do any building work to adapt your home.
Choose a name for your business
You can trade under your own name, eg M.Y.Self, or use another business name, eg Peerless Promotions. If you decide to use a business name, you must make sure that your business stationery displays your name as well as the trading name of the business for example, M.Y.Self, trading as Peerless Promotions. Your trading name should not be the same as - or too similar - to that of a business that already exists. Be careful that it does not contain words that people might find offensive or misleading.
As a sole trader you will have to pay income tax on any profits from your business. You must fill in a self-assessment tax return each year, detailing your income and expenses.
Make sure you register as self-employed with HM Revenue & Customs (HMRC) as soon as you start up in business on your own. If you fail to do this within the first three full months of becoming self-employed, you may have to pay a penalty of £100.
You'll have to make flat-rate Class 2 National Insurance contributions (NICs) throughout the year - £2.10 a week in 2006/07 and £2.20 in 2007/08. Setting up a monthly direct debit is a good way to ensure you pay in time. If your annual profits are over a certain amount - £5,035 for the 2006/07 tax year, £5,225 for the 2007/08 tax year - you will have to pay Class 4 NICs. You pay these along with your income tax - the amount you have to pay is calculated from your self-assessment tax return.
If your business has - or you expect it to have - a turnover of more than £61,000 a year, you must charge your customers VAT and send it to HMRC.
Sole traders can take on employees just like any other business. If you do, you will need to collect income tax and NICs from them and pay these to HMRC. You will therefore need to operate a PAYE (Pay As You Earn) payroll.
You must keep all the financial records you will need to fill in your tax returns.
The construction industry
Special rules apply to subcontractors in the construction industry.
Checklist: setting up as self-employed
In order to legally set yourself up as a self-employed sole trader there are several things you must do. Make sure that you:
- register as self-employed with HM Revenue & Customs (HMRC)
- obtain any permits and planning permission that you may need from your local authority
- contact your local authority to find out whether you need to pay business rates
- register for VAT if you expect to have turnover of more than £61,000 a year (from 1 April 2006)
- set up a financial record-keeping system
- put your name on all your business stationery, including letters, invoices, receipts and cheques
It's worth remembering, though, that this is just a start. As you continue in business, you may well have other legal and tax issues to bear in mind. Please visit our service site for professional help after start up.