How to Register as a Sole Trader

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One of the first steps when starting your business is deciding on the right business structure. If you’ve chosen to become a sole trader, you’re on the right path!

Being a sole trader remains one of the most straightforward and popular ways to set up a business in the UK. Here are some key advantages that might have influenced your decision:

  • Simplicity: Setting up as a sole trader is one of the easiest and quickest options available. With minimal paperwork and no need to register with Companies House, you can get started right away.

  • Financial Ease: It’s generally simpler to manage your finances as a sole trader compared to other structures like limited companies. You’ll only need to file a self-assessment tax return each year and keep track of your income and expenses.

  • Fewer Legal Responsibilities: Compared to limited companies, sole traders have fewer formal obligations, making it easier to focus on running your business.

  • Immediate Trading: You can start trading as soon as you’re ready without waiting for registration approvals (though you’ll need to notify HMRC of your self-employment status).

If these perks align with your business goals, then it’s clear why you’ve decided to go down the sole trader route. Now, let’s dive into the simple steps to get you officially registered and ready to trade!

Liability and profits for sole traders

A crucial point to understand when setting up as a sole trader is that there’s no legal distinction between you and your business. Essentially, you are the business!

This means you’ll keep all of the profits, but it also means you are personally liable for any business debts. If your business runs into financial trouble, your personal assets could be at risk.

While this does place more responsibility on you, it also makes accounting simpler. As a sole trader, you’ll only need to keep track of your income and outgoings for your self-assessment tax return. However, you’ll still need to ensure your records are accurate, up-to-date, and compliant with HMRC requirements.

Do sole traders need a business bank account?

Sole traders are not legally required to have a separate business bank account. However, having one can make managing your finances much easier, particularly if you’re also employed or run multiple businesses. It helps keep your personal and business finances distinct, making it simpler when it comes to tracking your income and expenses for tax purposes.

As a sole trader, remember that you are personally liable for any business debts. So, practising good financial management and keeping accurate records is essential to staying on top of your finances.

Also, bear in mind that some banks may require you to be officially registered as a sole trader before you can open a business account. It’s a good idea to check with your bank for their specific requirements.

Can I trade as a sole trader before I register my business?

Yes, you can start trading as a sole trader before officially registering with HMRC. However, it’s important to note that you must register by 5th October in your second tax year at the latest.

As accountants, we always advise our clients to register as soon as possible. The sooner you register, the easier it will be to stay compliant with tax obligations. Even if you’re not officially registered yet, make sure to keep detailed records of your income and expenses from day one. This will make completing your Self-Assessment tax return much smoother.

Registering as a sole trader

Once you’ve decided to set up as a sole trader, there are a few key steps and considerations to keep in mind before you register.

Naming your sole trader business

As a sole trader, you’ll register under your own name, but you can also choose a separate name to trade under. For example, John Smith could register as ‘John Smith’ but trade under the name ‘Sweet Treats Bakery’ or ‘High Street Newsagents’.

Unlike limited companies, sole traders don’t have to ensure their business name is unique when registering. However, it’s important to check that your chosen business name doesn’t infringe on any registered trademarks. Using a name that’s already trademarked could lead to legal issues down the line.

Other rules you need to be aware of when choosing a name for your sole trader business

When choosing a name for your sole trader business, there are a few rules you need to follow:

    • No Suffixes: You can’t add suffixes like ‘Ltd’ or ‘PLC’ to your business name, as this could cause confusion regarding your business structure. These suffixes are reserved for limited companies.

    • Sensitive Words: You can’t include certain ‘sensitive words’ in your business name, as outlined by the UK government. For example, words like ‘charity’ or ‘chartered’ are off-limits unless you’re legitimately registered as such.

    • Offensive Names: Business names must not contain anything offensive, as this could violate regulations and lead to legal consequences.

    • Invoice Requirements: If you’re trading under a name different from your registered name, you’ll need to include both your registered name and your trading name on all invoices and official documents.

    • Managing Multiple Businesses: Having a trading name can be especially helpful if you run multiple businesses under the sole trader structure, making it easier to track and manage your different ventures.

Do you even need to register as a sole trader?

If your sole trader business is small, you may not need to register with HMRC right away. Many people run side hustles or hobby businesses, and HMRC recognises this.

Thanks to the Trading Allowance, you can earn up to £1,000 from self-employment without the need to register. It’s important to note that this allowance is based on income, not profits!

If you’re unsure whether you’ll exceed the £1,000 threshold, don’t worry. Just keep accurate records of your income. If you do need to register, remember that you have until 5th October in your second tax year to do so.

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Registering with HMRC

As a sole trader, you don’t need to register with Companies House. Instead, you must inform HMRC that you’ll be submitting tax returns through Self-Assessment.

You can do this by either completing a CWF1 form or by registering online through the HMRC website. If you choose to register online, make sure to keep a record of your account details, including your Gateway ID and the email address you used. This will be essential when you need to sign in and submit your tax returns.

Your Unique Taxpayer Reference (UTR)

Once you’ve registered, HMRC will send you your Unique Taxpayer Reference (UTR) by post. If you register online, they will also send an activation code for your online account as an additional security step to verify the address is legitimate.

Your UTR is a vital piece of information that proves you are running a sole trader business. You may need it when registering for business services or when dealing with larger wholesalers or suppliers. So, be sure to keep it safe and easily accessible!

After registering as a sole trader

Once you’ve registered for Self-Assessment, you’ll be required to submit tax returns each year. This is mandatory unless you inform HMRC that you’ve stopped trading or no longer meet the criteria for being a sole trader.

Key tax dates for sole traders

As a sole trader, it’s crucial to stay on top of key tax dates throughout the year. Here are the important deadlines to remember:

  • Start of the tax year: 6th April
  • End of the tax year: 5th April the following year
  • Self Assessment registration deadline: 5th October (by the 5th of October in your second tax year)
  • Sending your Self Assessment tax return by post: Midnight, 31st October
  • Submitting your Self Assessment tax return online: Midnight, 31st January
  • Tax payment deadline for balancing payments: Midnight, 31st January
  • Payment on account deadline: Midnight, 31st July

Keeping track of these dates will ensure you stay compliant and avoid any penalties.

Important HMRC Dates

Your financial year and the tax year

The dates of an accounting year can be confusing for many sole traders. What if, for example, you began trading on October 1st 2021?

For sole traders, the easiest thing to do is have your first financial year run from the date you start trading, until the end of the tax year. In this scenario, that would be from October 1st to April 5th.

It’s not essential to do this, but having your financial year line up with the tax year makes submitting Self-assessment tax returns much easier!

Payments on account

If your Self Assessment tax bill is more than £1,000, you’ll need to make payments on account. Just for clarification, that’s £1,000 in payable taxes, not £1,000 in turnover or profit.

Making Tax Digital (MTD) for Income Tax

Already available for VAT returns, the government is still planning to roll out MTD for income tax. Under current plans, this will apply to sole traders whose income exceeds £10,000 in a single tax year, starting from 6th April 2026 (not 2023, as previously planned).

In short, it means your business will need to keep digital financial records. This may involve using an app or a piece of accountancy software to record and monitor your income and outgoings.

The idea is that digital systems are much less likely to make errors, which will make your Self-assessment tax return more accurate.

So there you have it! Our ultimate guide to registering your business as a sole trader.

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