Registering your business
Sole Trader or Limited Company? #
Before you tell HMRC about your business, you’ll need to decide whether to set up as a sole trader or a limited company.
Many freelancers start as a sole trader then ‘upgrade’ to a limited company once they’re more confident about the longevity of their business. This is a perfectly sensible approach: it keeps costs down and makes accounting simple.
A popular perception is that the main reason to set up a limited company is reduce tax. There used to be a big tax advantage to being a limited company, but this has significantly reduced.
Contractor Calculator estimate that the tax advantage for limited compan directors is around 7% higher than an employee within the £14,500 – £50,000 income bracket range. More thoughts on that in this Work Notes article.
In reality, the strongest reasons to form a limited company are:
- Legal separation between the individual and business
- Some clients won’t work with sole traders
Putting a legal barrier between the person and the business is useful from a peace-of-mind perspective should anything go wrong.
One key difference between being a sole trader and a limited company is the complexity of accounts. Many sole traders file their own accounts, but the financial nuances of a limited company usually requires an accountant.
Whatever you decide, I’d strongly recommend talking to an accountant and working with one if you can. If you don’t want to have to worry about the self-assessment form or what expenses you can/cannot claim, it’s money well-spent.
Most accountants can help get you set up as a sole trader or limited company and talk you through everything you need to know.
That said, if you decide to go down the sole trader route, here’s what you need to know.
Sole trader #
Once you’ve set up and started trading, you’ll need to let HMRC know that you’re running a business. This registers you on their system and they’ll expect to receive a self-assessment each year.
According to GOV.UK you need to register as soon as you earn “more than £1,000 from self-employment” in one tax year (6th April → 5th April).
There are a couple of stages to registering with HMRC:
- You fill out an online form
- HMRC send you your Unique Tax Reference (UTR) number in the post
- HMRC send you activation code for your online account
It’s reasonably straightforward, but I’d suggest registering as soon as you hit the £1,000 threshold. That gives you time to iron out any issues and means you don’t need to stress about post arriving on time.
HMRC also say to “register by 5 October in your business’s second tax year. You could be fined if you do not.”
There’s more information about this process on GOV.UK – it’s well-worth reading through the information.
£1,000 threshold #
If you earn less than that, you don’t have to register with HMRC or pay tax on the income. If you earn more than this, you may have the option of using the trading allowance instead of your actual business expenses.
This is a £1,000 tax exemption available to some sole traders, and may be useful if your actual expenses are less than £1,000. For information and examples, check out this useful FreeAgent definition.
You may also need to register your business with Information Commissioner’s Office (ICO). This usually costs around £30/year and they have a self-assessment tool to check whether you need to register.