In the UK, those working for themselves have to let HMRC (HM Revenue and Customs) know so that they can ensure they are paying the right amount of tax. There are a few ways to register as self-employed, be it as a sole trader, limited company or business partnership. But is there a difference between being a sole trader and being self-employed?
What is the difference between being a sole trader and being self-employed?
There is very little difference between being a sole trader and being self-employed, so much so that to register as self-employed, you must register as a sole trader. You cannot register as one without the other.
The term sole trade describes a business structure, wherein a person is the exclusive owner of their business and is entitled to all profits after tax. Alternatively, being self-employed simply means that a person does not work for somebody else and that they run a business or trade goods and are responsible for all success or failure that their business may encounter.
If you are self-employed, in order to register to pay tax, you must register as a sole trader with HMRC. There are other ways to work for yourself, including a limited company wherein you run a business but earn a wage and are registered with companies house, or a business partnership.
If you've started your own business and you're looking into the financial side of things, you may well be wondering how to register as a sole trader. Or perhaps you're wondering: is it worth registering as a sole trader?
Why you should register as self-employed/a sole trader
Aside from the legal side, there are a few different reasons you should register as self-employed. For one, it is the simplest way to ensure you are paying the correct amount of tax for your business. Here we cover how to track your accounting/finances as a freelancer which would also be self-employed.
If you set up a limited company, you have to pay corporation tax which you may need an accountant for and you also earn money through wages as opposed to the profits your business makes. When you register as a sole trader, you only have to pay income tax based on a self-assessment tax return that you send in each year, and you are entitled to all of your profits after that.
What happens if you do not register as a sole trader
For those who don't register as a trader or limited company or business partnership, HMRC is likely to fine you. These fines can range from 30% of the tax you owe to 100% of the tax you owe, depending on whether or not a judge determines you purposefully failed to file your taxes or whether it was accidental. On top of the fine, there may well be daily fees and interest.
When do I need to register as a sole trader?
In terms of when in the year to register as a sole trader, you must register and then file for a self-assessment before October. This then allows you to fill out and send your self-assessment tax return by the end of January so that you can pay the correct income tax and national insurance contributions for the next tax year.
You must register as a sole trader as soon as your earnings from April to April exceed £1,000. You may also need to register to prove your status as self-employed or to help you qualify for benefits.
The easiest thing to do is to alert HMRC of your business as soon as you begin to earn profits. That way you don't risk receiving any fines for missed deadlines or incorrect tax.
How to register as a sole trader
The first step in registering as a sole trader is to register for the self-assessment process with HMRC. If you haven't registered for this before, they will send you a code in the post within 10 days to allow you to access the self-assessment. This activation code allows you to prove your identity and complete your self-assessment.
Once registered as a sole trader, you should make sure that all of your invoices and paperwork are in order. You may also want to plan ahead to ensure that you will have all the documents ready for your eventual self-assessment tax return.
What are the responsibilities of a sole trader?
When you decide to start your own business you gain a number of new responsibilities that you are unlikely to have had before. Many of these are tax-related. As a sole trader, you are responsible for:
- Keeping detailed, accurate, and up-to-date records about your business' finances. This includes information about employees, pay, taxable income, business expenses, and any other financial information.
- Filling out and submitting accurate Self-Assessment reports each year before the January deadline.
- Paying any and all income tax and national insurance contributions provided on your tax bill from HMRC following your submission of a Self-Assessment.
- Paying any VAT (value-added tax) on any earnings over £85,000.
What to do if you're not sure whether to register as a sole trader
If you're a self-employed person running a small business and you're not sure whether or not to register as a sole trader, there are other options.
As aforementioned, you can opt to register with companies house as a limited company. This is a different business structure to a sole trader, and you will earn a wage as opposed to profits. You will also have to pay corporation tax. However, your personal finances will be legally separate from your business income, whereas sole traders have personal liability for their business' debts.
Alternatively, you could set up a business partnership which is another business structure altogether. You and your partners all share responsibility for the business, unlike limited companies and sole traders. Each partner is entitled to a share of the profits, and each partner will pay tax on their share.
Anyone unsure whether to register as a limited company, sole trader or business partnership can speak to a financial and tax expert, or contact HMRC for advice on which of these categories their small business comes under.
