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Registering as sole-trader with HMRC – the challenges explained

Starting your own business or going freelance? Get the low-down on HMRC’s rules for registering as self-employed in this insightful article.

5 min read

When you’re outside looking in, being a sole trader seems like the perfect lifestyle. Imagine: flexible hours, higher income potential, independence. So, you take that step and join the ranks of the 4.8 million other Brits who serve no master.

But first you will have to register with HMRC. And that’s when it hits you –  you’re on your own.

The responsibilities begin to weigh down on you. You need to find work, decipher expenses, catalogue cash flow, and of course, file your own taxes. And what about job security, paid holiday, sick pay and…

Don’t worry - we’re here to help

You know the upsides of life as a sole trader, but now it’s time to understand the challenges. Registering with HM Revenue and Customs (HMRC) as self-employed is the first step.

When do I make it official?

The moment you begin working for yourself, HMRC considers you a sole trader. Your business’s active start date is either:

  • when you begin to market your business or

  • when you have goods or services to sell and a customer base.

Whichever happened first.

Make sure you register with HMRC as soon as possible. Failure to do so within 3 months of starting your enterprise will earn you a £100 late fee. If you continue to delay, your penalty could swell to as much as £1,600.

Remember, some self employed people decide to register as a limited company instead. If you’re not sure which is right for you, read our blog on the benefits of each route.

How do I tell HMRC that I’m a sole trader?

The easiest way to inform HMRC that you’re becoming a sole trader is to register online. They have easy to follow step-by-step guides to walk you through the process. There’s also a newly self-employed helpline you can call to get further help. You can reach them on 0300 200 3504.

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What information do I need?

When registering yourself as a sole trader  with HMRC, you’ll be asked to provide personal and business information, like your National Insurance number, which they will use to establish your tax records. You’ll also be registering for their online services simultaneously - these allow you to send your tax forms online.

Registering as a sole trader with HMRC means that you’re registering for both Self Assessment tax returns and Class 2 National Insurance. 

What are the benefits of registering?

You’ll have the satisfaction of being officially self employed – plus you’ll avoid hefty fines. 

Registering as self-employed with HMRC automatically sets up your online account, which you can view at any time. This lets you send tax returns online, check payment due dates, and register for other business taxes such as Value Added Tax (VAT) if your annual turnover exceeds a certain amount (currently £85,000).

HMRC will also give you a Unique Taxpayer Reference (UTR) number. This ten-digit number is used to get in touch with HMRC and access your Government Gateway account.

Are there any additional responsibilities?

Yes. Being a sole trader means you’re responsible for filling out your own National Insurance Contributions (NICs) along with your tax returns. There are two main types of NICs that you might have to pay – Class 2 and Class 4.

Class 2 NICs are compulsory, and due from the day your self-employment begins. 

Paying into your Class 2 NICs counts towards benefits such as the basic state pension, employment and support allowance, and maternity allowance fund. Class 2 NICs are currently set at £3.05 a week.

You may be exempt from Class 2 NIC payments if:

  • you’re under 16 years old or at state pension age

  • you’re a married woman or widow with a Certificate of Reduced Rate Election

  • you have a Certificate of Small Earnings Exception if your earnings are below a certain amount, which varies year by year.

Class 4 NICs are based on your profits for the fiscal year. They are:

  • compulsory if your earnings are above a certain amount (currently £9,501)

  • not calculated on a flat rate, but based on a percentage of your taxable profits. This is changeable year by year

  • automatically calculated when paying online.

How can I make Self Assessment painless?

The key to an easier Self Assessment is keeping accurate records of your income and expenses. You can do this on paper, but digital record keeping is the more secure option. If you use a financial management software like QuickBooks, you can manage everything in one place and start getting organised from day one. 

The QuickBooks mobile app extracts the data from a photo of a receipt, uploading the details to your expenses. You can also use the mileage tracker to sort personal trips from business travel the easy way.  When you send your invoices from QuickBooks all the information you need is already in the system, and if you connect your bank you’ll be able to see all your transactions in one place – you can even reconcile them automatically, ready for tax time.

For more information, visit Working For Yourself on gov.uk.

Feel you’re better informed about registering as a sole trader with HMRC? The QuickBooks Blog covers a wide range of business-related topics – it’s all part of our mission to help small businesses grow.

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