Have you been thinking about setting yourself up as self-employed recently? Maybe you have been made redundant or have found yourself furloughed for months due to Covid. Or maybe you just fancy working for yourself.
If you want to be your own boss without the hassle of setting up a limited company, setting yourself up as a sole trader can be an easier option.
What is a sole-trader?
A sole trader is a person who runs their own business as an individual and is classed as self-employed. As a sole trader you are able to keep all profits from your business after you have paid tax on them. You must follow certain rules on running your business, and you will be personally responsible for any losses made by your business.
When do you need to set up as a sole trader?
If you have been earning a bit of money on the side from a hobby or freelancing it’s important to know when you are required by HMRC to turn this into a business.
You must register as a sole trader if any of the following apply:
- you earned more than £1,000 from self-employed activity in the last tax year
- you need to prove that you’re self-employed, for example for claiming Tax-Free Childcare
- you want to make voluntary Class 2 National Insurance payments to help you qualify for benefits
How to set up as a sole trader
If you need to set yourself up as a sole trader you can register on the Gov.uk website.
You have to tell HMRC that you pay tax through Self-Assessment, and you will need to file a tax return each year.
Your responsibilities as sole trader
As sole trader you will need to:
1. Keep all records of your business’s sales and expenses
- all sales and income
- all business expenses
- VAT records if you are registered for VAT
- PAYE records if you have employees
- records about any personal income
- your grant, if you claimed through the Self-Employment Income Support Scheme (SEISS) because of coronavirus
2. File a Self Assessment tax return each year
Self Assessment is a system HMRC uses to collect Income Tax from the self-employed. If you need to file a Self Assessment, you submit it online after the end of the tax year (5th April) it applies to, and must make any payments by the following 31st January.
3. Pay Income Tax
As a sole trader you are required to pay income tax on your profits, as well as Class 2 and Class 4 National Insurance contributions. You can use HMRC’s calculator to help you work out how much you will need to pay.
4. Register for VAT
You need to register for VAT if your company’s turnover is over £85,000. It is also possible register voluntarily for VAT in some cases, for example if you sell to other VAT-registered businesses and want to reclaim the VAT.
If you need any help setting yourself up as a sole trader, please feel free to get in touch with us here at Magpie Accountancy.