Anyone who intends on working on a self-employed basis either by running their own business or is working on a freelance basis is legally required to register as a ‘sole trader’.
This is a legal requirement because HM Revenue and Customs calculate your tax and National Insurance contributions based on your official earnings. Failure to register as a sole trader and declare your earnings through self-employment will cause you to not only be liable for back payment of tax contributions but also to significant fines and even imprisonment for tax evasion.
Luckily, registering as a sole trader is a fairly easy process which can often be completed within a day. All you need to get set up is your personal details such as date of birth and National Insurance number as well as business details such as the start date and type of business. This process can be done over the phone through the HMRC Newly Self-Employed Helpline or by completing a form from the HMRC.
Once a business owner is registered as a sole trader, they are required to fill out their own tax assessments on an annual basis in which they provide the HMRC with details of their income and expenses from which their tax is calculated. In addition, they are responsible for paying National Insurance Contributions of £2.80 per week through a tax self-assessment form depending on their annual profits.
Becoming a sole trader is a preferable option to setting up a limited company because it requires significantly less paperwork to get started and does not require any set up costs. IT is the simplest form of business structure that a business owner can set up, and is easy to convert to other business types if needs be. In addition, sole traders (despite the name) are permitted to employ others provided they collect their employees tax contributions through a Pay As You Earn payroll scheme.
Being registered as a sole trader does not come without risks though. As a business registration with ‘Unlimited liability’ sole traders are liable for paying their business debts if their business fails meaning that it is the best option for aspiring business owners who do not have very high set up costs. Insurance is consequently a greater concern for registered sole traders because they have a greater risk. Seeking insurance is important to ensure that they are covered for financial issues or injury/sickness that prevents them from being able to work.
Thanks to informi for providing us with this insight. For more information about starting your own business in the UK, visit our website today.