The easiest way to start a business in the UK is through self-employment. If you’re considering working for yourself, you’re probably wondering how the self-employed registration process works in the UK and what else you need to consider when setting up your business. You can find all the information you need in this article.
Sole trader in the UK: self-employment or limited company?
Before you even start a business in the UK, you need to ask yourself an important question: is self-employment or setting up a limited company a better option for you?
The nature of your business will play an important role. It’s worth weighing up the pros and cons of each option. Better still, discuss the decision with your accountant.
Step 1: Registering self-employment in the UK when you start working
Let’s assume that in your case, self-employment in the UK is a better solution than a limited company. In this situation, you need to register your business.
It’s best not to delay and to do this as soon as you start working for yourself. In practice, however, you do not need to register as self-employed in the UK until 5 October in the second tax year of your business. The tax year runs from 6 April to 5 April of the following year.
For example, if you start your sole trader business in February 2021, you have until 5 October 2021 to register. On the other hand, if you start working for yourself for the first time in May 2021 (at the start of the next tax year), you have until 5 October 2022 to register your sole trader with HMRC.
How do I register a sole trader with HMRC? 3 possible methods
Now that we know when to register, it’s time to answer the next important question – how do I do it? There are three different methods to choose from.
- If you are registering as a self-employed person for the first time and have NOT previously filed a tax return, you can complete the entire process online. You will also register for Self Assessment and National Insurance at the same time.
- If this is your first time registering as a self-employed person and you HAVE previously filed a tax return, you must register as a self-employed person and as a Class 2 insured person using form CWF1. This will allow you to keep your existing Self Assessment account.
- If you have previously registered as a sole trader, you will also need to do so on form CWF1.
Step 2: Choose a name for your business in the UK
What are you going to call your business? This is a question that many people find challenging.
You can choose to trade your business simply under your own name. Alternatively, you can use the format „[Your name] trading as [business name]”.
In the latter case, it’s important to check whether the business name you’ve chosen is already in use. There’s no register of business names for self-employed people in the UK, so you’ll need to use an internet search engine to check.
If it turns out that someone has already taken your name, don’t take the risk and choose an alternative name for your UK business. This will save you from potential problems and the stress of another business owner making a claim against you.
Step 3: Remember your tax obligations
Once you have registered with HMRC as a self-employed person, you are responsible for calculating and paying your tax and National Insurance contributions. This responsibility includes the requirement to complete and submit a Self Assessment tax return each year.
But taxes aren’t the only thing to worry about. If you run a business in the UK, you will also have to pay National Insurance Contributions (NICs). In 2022, Class 2 NICs will mean paying £3.05 per week on earnings over £6,515 per year.
There are also Class 4 NICs, which are currently
- 9% on annual profits from £9,568 to £50,270,
- 2% on profits above this amount (tax year 2021/2022).
Most sole traders prefer to concentrate on their business and not waste time on taxes. Especially since, as you can see, the rules for calculating taxes and contributions are complex.
Hiring an accountant can be a great help. Not only will you have the peace of mind of having an experienced person looking after your finances, but you may also save unnecessary costs – an accountant can show you the most tax-efficient way to operate.
Step 4: Check if you need to register for VAT
It’s not always necessary to register for VAT. However, you will be required to register if your business turnover exceeds the current VAT registration threshold of £85,000. You then only have 30 days to register.
Sometimes it can be advantageous to register for VAT before your turnover reaches the legal threshold. So it’s worth checking early on whether it makes sense for your business.
Step 5: Obtain the necessary licenses
This is not a compulsory step for all self-employed people. It depends on the type of business you run. Only in some cases will you need a licence – for example, if you want to become a taxi driver or provide childcare.
To obtain a licence, you will usually need to complete specific training and obtain the necessary qualifications. In some cases, an inspection may also be required to assess whether your business is compliant and operating within the law.
Step 6: Open a business bank account
Registering for self-employment in the UK does not require you to open a separate business bank account. However, there are many advantages to doing so.
One of your main duties as a sole trader is to keep a „complete, accurate, and readable” record of your income and expenses.
This can be difficult if you use the same account for both business and personal transactions. You’ll need to go through your bank statements line-by-line to determine which expenses are business-related. It will also be more complicated to determine which amounts qualify as allowable deductions (personal expenses do not).
Having a separate business account makes things much easier. It’ll also give you a clearer picture of the financial health of your business.
