Q: How do I Register as an Independent Contractor (Sole Trader) in the United Kingdom?
Learn how to register as an independent contractor (sole trader) in the United Kingdom, from registering your entity to tax implications.
If you have questions about becoming a sole trader in the United Kingdom, look no further! Here we break down the essential information and steps that you’ll need to know. The information here should not be used in place of legal counsel and can also largely be found on the British government’s website.
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What is a sole trader?
In the United Kingdom, sole traders are self-employed individuals who have a business in their own name. Being a sole trader gives you the freedom to choose what work you want to do, however, and whenever that may be.
If you become a sole trader, you will be personally accountable for any business losses and responsible for paying tax on your business’s profits. Keep in mind that a sole trader isn’t guaranteed the same benefits as traditional employees, so you may not be entitled to sick pay, holiday pay, etc. As a sole trader in the United Kingdom, you are the trading entity, which means you should always meticulously look over contracts before signing since you will be held liable.
You can register and become a sole trader if you meet any of these three conditions:
- In the prior tax year, you earned over £1,000 from self-employment.
- You need to prove you’re self-employed to claim certain benefits such as Tax-Free Childcare.
- You want to make voluntary Class 2 National Insurance payments to help you qualify for benefits.
Creating a Business Name
Now that you know the basics of sole tradership, it’s time to think of a name for your business! It can be either your name or something else, and regardless of your choice, it is not necessary to register the name. Even though it’s not mandatory to register your business name, remember that you still must put the name on any and all official documents.
When choosing your name, keep in mind that the name cannot do any of the following:
- Include “limited”, “Ltd”, “limited liability partnership”, “LLP”, “public limited company” or “plc”.
- Be offensive.
- Be the same as an existing trade mark unless you get permission, or else you might be sued. It’s okay for two sole trader businesses to have the same name as long as neither objects to it.
- Include a sensitive word or expression or imply a relation to government/local authorities unless you obtain permission.
If you want to prevent another business from using the name you have selected, you’ll need to register for a trade mark.
As a sole trader in the United Kingdom, you must let H.M. Revenue and Customs (HMRC) know that you will pay tax through Self Assessment. It’s important to do so since you will claim that you are earning income as a self-employed professional. HMRC allows you to register online for Self Assessment free of charge. Keep in mind, once you start business operations, you must register for Self Assessment before October 5th of your business’s second tax year.
To register as sole trader directly with HMRC, you must first have a government gateway account. Most often, it takes about 10 days to get an activation code for the government gateway account. Once you set up that account, you can finish registering for sole tradership. Then, about 10 days after you complete your sole trader registration, HMRC will send you your Unique Tax Reference (UTR), which serves as proof of your registration.
The details of how you go about registering will vary depending on your past tax history.
- You haven’t sent a tax return in the past (as a new sole trader): You must register for Self Assessment and Class 2 National Insurance.
- You previously sent a tax return online: You need to re-register online with the CWF1 form as a sole trader and for Class 2 National Insurance, using your 10-digit Unique Taxpayer Reference (UTR) from your previous registration.
- You never sent a tax return online before: You must either register online or print this form and then send it by post to HMRC. You’ll receive a letter from HMRC with your Unique Taxpayer Reference (a 10-digit UTR) and can set up your online account. The registration process can take 10 business days if filing from within the UK or 21 days if filing from abroad.
The United Kingdom has National Insurance Contributions (N.I.C), a system that allows people to qualify for some state benefits, like State Pension. If you are a sole trader in the United Kingdom over the age of 16 and working as a self-employed with a profit of £6,365 or more a year, you must pay mandatory National Insurance. If you’re self-employed, you will likely pay two types of National Insurance – see more details about insurance rates, amounts, and how to pay.
For U.K. residents: You should have received an N.I. number and card before you turned 16. You can also find the number on past payslips, P60, National Insurance section of your personal tax account, or any letters about your tax, pension, or benefits.
For those without an N.I. number: You can apply for one. If you are moving to the U.K., check the back of your biometric residence permit, you may have a National Insurance Number listed there.
Business Records and Accounting
As a sole trader in the United Kingdom, you’ll need to keep records of all your business income and expenses. You’ll need these records to determine the profit and loss for your tax returns and to show them to HMRC if requested.
You’ll also need to choose an accounting method. Most sole traders in the United Kingdom use cash basis accounting, which means that you record income and expenses in your financial records when you receive money or pay a bill. So if you complete a project but don’t receive the payment prior to the tax year ending, that income won’t be reflected until the following tax year. If your business income is over £150,000, you’ll need to use traditional accounting.
Tax Returns and Payments on Account
Once registered for Self Assessment, you must file a Self Assessment tax return each year and pay tax on what you earn. If you were self-employed as a sole trader in the last tax year and earned over £1,000, then you must send a tax return. You can file tax returns in paper form, which are due by October 31st following the end of the tax year to HMRC. You can also file tax returns online with HMRC due by January 31st following the end of the tax year. Your Self Assessment tax bill also has the same January 31st deadline. You will be penalized £100 if your tax return is up to 3 months late — if longer than 3 months, the penalty can be larger.
You might need to start advance payments toward your taxes (known as “payments on account”) after paying tax and National Insurance through Self Assessment. Remember that each year you’ll have to make two payments on account unless:
- The most recent Self Assessment tax bill you paid was under $1,000.
- You’ve paid more than 80% of all your taxes already.
Start the journey to becoming a United Kingdom sole trader today!
Now, that’s all you really need to know to become a sole trader in the United Kingdom. Whether you want to work as a self-employed handyman or a freelance writer, the information here will get you on your way. When you’re ready, the U.K.’s government website can also help guide you through these steps. The process is not hard; don’t be afraid to dive in!
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Category: Compliance Ask Liquid Finance and Accounting
Updated: November 3, 2020
Quick note: This is not to be taken as tax advice or legal advice or payroll advice. Since tax rules and laws change over time and can vary by location and industry, consult a CPA / tax advisor and/or attorney for specific guidance.