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For a growing number of people, working for themselves would be their ideal career path but the paperwork and administration seems daunting.
This guide aims to take you through the process in a straightforward manner.
The first step is often to run your own business as an individual before considering becoming a Limited Company. This is referred to as either being a Sole Trader or Self-Employed, the two terms mean the same.
One misconception is that being a Sole Trader means that you have to work alone. There is nothing to prevent you from taking on staff but, as a Sole Trader, you are responsible for the business.
As soon as is possible after starting your business, you need to register with HMRC to complete a Self-Assessment Tax Return.
If you are a new Sole Trader who has not registered before, you need to complete the form at https://online.hmrc.gov.uk/registration/newbusiness.
In a change for the 2015-16 tax year, the Class 2 National Insurance contributions of £2.80 a week will now be collected as part of the Self-Assessment Tax Return. This is topped up by Class 4 National Insurance that is based on the profits of the business.
For historic reasons, the tax year runs from 6th April to 5th April and the deadline for submitting the Tax Return for that period and paying the tax due is 31st January in the following year.
If the total amount due in the first year is over £1,000.00, the HMRC will require an additional advance payment for the second year of 50% of the total on 31st January and a further 50% on 31st July.
Taking the example of a business that makes a £20,000 profit in the 2015-16 tax year and where the Sole Trader has no other sources of income, the Income Tax and National Insurance payments would be as follows:
| 2015-16 Tax Year | Income Tax | Class 4 National Insurance |
| Business Profit |
£20,000.00 |
£20,000.00 |
| Personal Allowance |
£10,600.00 |
£8,060.00 |
| Taxable Profit |
£9,400.00 |
£11,940.00 |
| Tax / NI Rate |
20% |
9% |
| Tax / NI Due |
£1,880.00 |
£1,074.60 |
| Class 2 National Insurance @ £2.80 per week |
£145.60 |
|
| Total 2015-16 due on 31/01/17 |
£3,100.20 |
|
| 1st Payment for 2016-17 due on 31/01/2017 |
£1,550.10 |
|
| Payment Due on 31/01/2017 |
£4,650.30 |
|
| 2nd Payment for 2016-17 due on 31/07/2017 |
£1,550.10 |
|
The Advance Payments for the 2016-17 tax year would be offset against the actual amount Income Tax and National Insurance due in that year.
Our first Top Tip is to prepare and submit your Tax Return as soon after the 5th April as possible. The Income Tax and National Insurance will still be due on 31st January, so the earlier the Tax Return is submitted, the more time there is to set money aside for the payment.
The Income Tax and Class 4 National Insurance due in the year is calculated on the profit of the business and, for this, it is vital that you keep full details of the income that you make and the expenditure that you incur.
If the thought of keeping track of all your receipts through the year seems daunting, our second Top Tip is to use HMRC flat rates for the business costs of vehicles and working from home. Details are at https://cooperfaure.co.uk/simplified-expenses/
Our third Top Tip is that you set up a new bank account for the monies that you receive and the payments that you make for the business.
The final tax consideration is VAT. Currently, the income threshold over which VAT registration is compulsory is £82,000 in a twelve month period. However, a business can register for VAT on a voluntary basis at any time.
Our fourth Top Tip is that if you are providing business-to-business goods or services where your customers can reclaim the VAT on the invoices you issue, register for VAT from the start and to be able to keep some of the VAT charged.
As a Sole Trader, you can use your own name or trade under a business name. However, you must include your own name together with the business name, if you opt to have one, on any official paperwork such as invoices and letters.
If you want to start slowly before fully committing to working as a Sole Trader, you can be both employed and self-employed at the same time. For instance, you could continue to work for someone else during the day whilst building your own business in the evenings and weekends.
At CooperFaure, we have helped our clients follow their dreams by making this process as painless as possible. If you would like to discuss your circumstances or have any questions, please contact welcome@cooperfaure.co.uk to arrange an initial free consultation.
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