How to set up as a sole trader
Becoming a sole trader is a great way to start running your own business, but there’s lots to think about before you make that commitment. From how to become your own boss to what you need to consider before you start, find out what you need to know.
In this guide:
- What is a sole trader?
- Is there a difference between being a sole trader and self employed?
- Can I set up as a sole trader if I’m employed?
- How do I register as a sole trader?
- Tax as a sole trader
- How do I start working as a sole trader?
- Your responsibilities
- Work-life balance
- Make getting paid easier
- Which records should I keep?
What is a sole trader?
A sole trader runs their own business, and can keep the profits from their business after you have paid tax on them. You are responsible for the finances of their businesses, including any losses. If you run your business as a sole trader your business is treated as the same entity as yourself instead of creating a new entity such as a Limited company. So, as a sole trader there is little difference between personal and business income when it comes to paying your tax.
Being a sole trader means that the level of risk involved is much higher as you are personally responsible for your business's liabilities. So, if you are likely to have large debts in the business it is worth setting up a Limited company to reduce the personal risk.
Becoming a sole trader is the most popular option for setting up a business in the UK. A big reason for this is that it’s really easy to set up and report each year.
Depending on what you do, you could either work on job-by-job basis, on long or short term contracts or selling products/services by heading your own company. This could be working remotely, in-house at a company or in a specific location where your clients are based.
Is there a difference between being a sole trader and self employed?
A sole trader can work for themselves, which means you’re self employed. The important thing is that you become your own boss, and with that comes certain responsibilities. For example, you will be in charge of finding work, paying your own taxes and other costs. However, you will also have much more freedom and flexibility than being employed via PAYE.
You might not know that being a self employed means that you can have employees!
Can I set up as a sole trader if I’m employed?
Yes, you can. However, as a sole trader you are responsible for paying your own tax, so you will need to include the money you earn from your employment and self employment in your Self Assessment Tax Return.
You will also need to pay extra National Insurance Contributions; those taken from your employed salary, and those you will pay as self employed. Find out more about running a side business here.
How do I register as a sole trader?
If you earn over £1,000 as a self employed person in one fiscal year (for example 6 April 2019 to 5 April 2020) are must register as a sole trader.
The first thing you need do is register as a sole trader with HMRC. To do this, you will need to choose the name you want to trade under, following certain rules such as using a unique name which is not offensive. Registering as a sole trader is as simple as registering for Self assessment with HMRC.
Once you have made this decision, you can register for Self Assessment Tax. Also, check whether you need to register for VAT. You will need a National Insurance Number to do this, so ensure you apply for a national insurance number first if you’re new to the UK.
Tax as a sole trader
Before registering you will also need to choose which accounting method you are using, which will affect your tax return. You can either choose traditional (accrual) accounting or cash basis.
- Traditional accounting is when you record invoices and expenses the date you receive or make them.
- However, if you make under £150,000 you can use cash basis accounting, where you only record income or expenses the date you are paid or make a payment.
Cash basis accounting is one advantage of being a sole trader as this method is not available to Limited companies and other types of businesses. The cash scheme is a great option for some small businesses as they do not need to pay tax on profit until they receive it. This can really help the cash flow of small businesses.
How do I start working as a sole trader?
To start working as a sole trader you’ll need to find jobs or clients. There are lots of ways to do this, like looking on jobs websites or LinkedIn, networking, word of mouth recommendations, or doing your own marketing so potential clients or customers can find you.
Before becoming a sole trader make sure you understand the responsibilities you will have which are different from working as an employee.
You must file your Self Assessment Tax Return, which you can find out more about in this article. You should also contribute to your pension yourself, and pay your own National Insurance. These costs should be taken into account when you are pricing jobs. You should keep records the sales and expenses of your business.
If you have a turnover of over £85k a year you will need to be registered for VAT and file VAT returns. Under the new Making Tax Digital rules this needs to be done online using an MTD compatible software. Find out more about Making Tax Digital here. If you’re under the VAT threshold you can choose to voluntarily register for VAT.
Maintaining work-life balance as a sole trader is really important, as it is likely you’ll be setting your own work hours and deciding how much you work. Creating your own routine as much as possible can help give balance. It’s up to you whether you stick to 9-5 or choose a schedule that is better suited to when you feel most productive.
Making sure you set time aside to switch off from work can be challenging when you’re passionate about your business. But, having the balance to relax will help you be more effective in what you do. If you are working remotely or from home, creating a dedicated space like a home office is another way to keep a distinction between work and home life.
Make getting paid easier
As you will now be in control of your income, getting paid on time is crucial. We’ve put together some tips on how to avoid late payments here.
Sending professional, trackable invoices makes life as a sole trader easier, leaving you time to focus on finding new business and doing what you love. With Bokio, you can use our invoice generator to create unlimited invoices, send them to your clients, track and record them with your other accounting all in the same place.
Which records should you keep?
As a sole trader you are required to keep records for at least 5 years after your 31 January tax deadline for the tax year.
- Sales and income
- Business expenses
- Your personal income
- VAT records (if you’re registered)
- PAYE records (if you have employees)
One easy way to keep all of your records in one place is by using accounting software like Bokio. Bokio isn’t just an invoice software, but also lets you do your accounting with a simple step-by-step process, and has automated reports so you can keep track of your finances. Saving time is important as a sole trader, and Bokio can help.