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How to register as a sole trader

November 26, 2021
When starting your own business, it goes without saying that there's plenty that needs to be done to bring your business idea to life. However, before you get stuck into setting up your small business or startup, you'll first need to register as a sole trader to make things official.Not only is registering as a sole trader easy to do and free, but it's also imperative if you want to stay out of trouble with HM Revenue and Customs (HMRC). Failing to do so could see you slapped with some hefty fines, which could upset your cash flow and lead to you paying more tax in the long run.So how exactly do you register? We've outlined some of the things you need to know before registering as a sole trader, and the steps you need to take to get yourself set up.

Setting up as self-employed

Before you dive into registering for self-employment, it's worth considering if operating as a sole trader is the right legal structure for your type of business. We've outlined the pros and cons of setting up as a sole trader here, as well as some questions to ask yourself when trying to decide which business structure is best for you. If you're unsure, you can always register as a sole trader and change into a limited company as your business grows.

If you're settled on becoming a sole trader, make sure you register your business before the 5th October in your second tax year of trading to avoid being fined. This would mean that a business who started trading on 1st January 2021 would need to have registered their business by 5th October 2021.You'll also need to register if any of the following apply to you:
    You are earning more than £1000 from self-employment in a single tax year (6th April to 5th April)You need to prove that you're self-employed, for example to claim Tax-Free ChildcareYou want to make voluntary Class 2 National Insurance contributions (NICs) to qualify for a state pension and other government benefits
If you do miss the deadline, fines can be anywhere between 30% of tax owed if HMRC perceives your failure to register as 'non-deliberate', to 100% of what you owe if perceived as 'deliberate and concealed.' There's also the chance you'll get charged interest on your tax bill, alongside a daily penalty.While the fine is inevitable, the penalty for failing to do so can be avoided if you:
    Have what HMRC classifies as a 'reasonable excuse' for failing to register. This would typically be an event outside of your control, for example you had an unexpected stay in hospital that prevented you from dealing with your tax affairsYou didn't deliberately miss the deadline, either because you didn't need to register or you didn't realise when the registration deadline wasTold HMRC as soon as possible if your reasonable excuses ended but you still didn't register
In short, if you miss a deadline be sure to be as transparent with HMRC as possible. Or, you can make sure you never miss a deadline again by downloading Ember, where we'll automatically send you reminders surrounding important tax events.

How to set up as a sole trader

Unlike setting up a limited company, it isn't mandatory to choose a company name. Many sole traders choose to operate under their own name, but if you do decide to brand your business, you'll want to make sure you adhere to a few rules first.According to HMRC, sole trader business names should not:
    Include 'limited', 'Ltd', 'limited liability partnership', 'LLP', 'public limited company' or 'PLC'Be offensiveBe the same as an existing trademarkInclude a suggestive word or expressionSuggest a connection with a government or local authority unless you have permission to do so
Once you've settled on a name, you'll need to make sure that this is used on any official documentation relating to your business.The most important step of the whole process, registering for Self Assessment tells HMRC that you'll be paying Income Tax and National Insurance contributions from the earnings you make as a sole trader. As mentioned above, failing to register for Self Assessment can lead to some pretty hefty fines, so it's important to do this as soon as possible.If you're not sure exactly how to do so, follow our step-by-step guide to get yourself registered as smoothly as possible:

Create a Government Gateway account

Much like creating an account for any other site, HMRC will ask you to enter your name, email address and a secure password on the Government Gateway page. Once entered, you'll be sent a user ID to the email address provided, which you'll need for the next step in the process.

Select 'Add a tax'

Once you've logged into your Government Gateway online account using your user ID and password, you'll see an option to add a tax to your account.

Select 'Self Assessment'

From here, you'll be presented with a list of taxes you can add to your account, with Self Assessment being the only option you need to choose at this stage (you won't need to register for VAT until your earnings surpass the £85,000 VAT threshold). You'll then need to select 'Individual or sole trader' as your Self Assessment category.

Enter the date you started trading

This is the date that you officially started working for yourself, for instance when you started receiving income.

Add details about you as an individual

You'll then be asked to fill in some personal details, including your home address, contact details and your or your business's name. You'll also need to add your National Insurance number before you can officially register, so make sure you've got yours close to hand, or apply for one as soon as possible if you do not have one.

Add details about the work you do

To make sure you're taxed appropriately, you'll need to add some information about the nature of the work you do. This overview doesn't need to go deep into detail — a basic summary will suffice.

Review and submit your application

After you've sent everything off, you'll get a letter with a 10-digit Unique Taxpayer Reference (UTR) and be officially enrolled for online Self Assessment around 10 days after registration is completed. You'll need this UTR to submit your Self Assessment every year, so make sure you keep this number safe.

Re-registering as a sole trader

If you've previously been registered as a sole trader but plan on doing work that is different from what you were doing before, you'll need to fill out a CWF1 form to tell HMRC that you're looking to re-register before 5th October in your second tax year.Once you've submitted your CWF1 form, you'll need to follow the same steps as above. You'll need your UTR from when you registered before, and once you've submitted your registration request you can expect to receive a letter with a new account activation code within 10 days.

Start keeping records

Now that you've officially registered for Self Assessment, the next step is keeping a close eye on your income and expenses to make sure your Self Assessment tax return is as accurate as possible. Not only does keeping a stringent record of your expenses make it easier to claim the tax reliefs you're entitled to, but it also minimises the risk of your overpaying or underpaying your taxes.

The good news is that there's a lot less paperwork for sole traders than there is limited companies. Sole traders only need to record their business profits and losses, their income and their expenses — all which can be done very easily with Ember. Not only will we automatically categorise your transactions for you, but with our Sole Trader Pro plan our in-house qualified accountants can draft and send your Self Assessment tax return to HMRC for you — leaving you with one less thing to worry about.