How to Register for Self-Assessment as a Sole Trader?

A sole trader is a self-employed individual who runs their own business individually and is personally responsible for its liabilities. In the UK, registering as a sole trader for a self-employed individual is the easiest way to deal with the dynamics of a small-sized business. This guide explains how to register for self-assessment as a sole trader so you can fulfil your tax liabilities and ensure compliance with HMRC tax regulations.

Notably, unlike limited companies, sole traders are not required to register with Companies House. However,  they do need to maintain accounting records, pay income tax and file a self-assessment tax return with HMRC every tax year.

What is a sole trader?

When an individual is both self-employed and the sole owner of their business, they are considered a sole trader. As the name implies, sole traders are the only owners who, unlike a limited company, have no shareholders or directors and no one else bearing the business liabilities, contrary to a partnership.

Moreover, sole traders wield absolute and infinite control over their business, overseeing its assets and pocketing all post-tax profits. Nevertheless, while having all assets to oneself is a rewarding attribute of sole tradership, it is equally perilous or risky as well. 

To go into detail, with the business structure of sole tradership comes unlimited liability, meaning in the event the business collapses, becomes insolvent or is sued, the sole liability of the damages or debts to creditors will go to the owner: the sole trader.

Typically, sole traders run small businesses, providing services to individuals and families. Accordingly, they do not need to hire a large number of employees to carry out their operational tasks.

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When do sole traders need to register for self-assessment?

HMRC uses the Self-Assessment system to collect income tax and NICs from self-employed individuals, including sole traders. It is noteworthy that it is mandatory for sole traders to register for Self-Assessment with HMRC for the obligatory purpose of reporting their income and paying income tax. 

Now, as per HMRC guidelines, an individual must register as a sole trader (self-employed) if:

• They earn more than £1,000 in a tax year, which runs from 6 April to 5 April.
• They prove they are self-employed. It is necessary to claim tax-free childcare.
• They opt to make voluntary Class 2 National Insurance payments to become eligible for benefits and State Pension.

Now, after knowing who must register as a sole trader, next comes the crucial question of how to register as a sole trader.

You need to register as a sole trader by registering for Self Assessment.

If you have registered for Self Assessment for another reason, you will need to register again.

As a sole trader, you are obliged to file a Self-Assessment if:

• You have registered with HMRC as a sole trader and have earned more than £1,000. Take note that this £1,000 amount should be earned before any tax is paid.
• You are a part of a business partnership.
• You have a total taxable income exceeding £100,000.
• You need to pay the High Income Child Benefit Charge.

For more details, you can visit the government website.

Furthermore, filing a self-assessment is also necessary even if you earned any untaxed income, including:

• Money that you obtain by renting out a property.
• Any income you have acquired through savings, investments, dividends, or pensions.
• You will need to report tips and commissions.
• Any taxable income you have received from overseas.
• You have received taxable capital gains from the sale of business equipment or machinery.

Take note that if you register late or do not register at all, HMRC might penalise you.

How to register for self-assessment as a sole trader?

The following steps will describe how to register for self-assessment as a sole trader:

Gather necessary details:

Before you register as a sole trader, ensure you have the following details:

• Full name and date of birth.
• National Insurance (NI) number.
• Contact details, including address and phone number.
• Business details, such as trade name and its nature (type of business activity).
• UK bank account details if you are choosing the option of direct debit payments.

Register with HMRC:

• If you are going to register yourself as a sole trader, you will have to register for both Self-assessment and pay NICs. Notably, your Self-Assessment can be submitted online via the gov.uk website. If you don’t already have one, you must sign up for a Government Gateway account before you can submit.
• To be able to access HMRC’s online services, you will first need to create a Government Gateway account through GOV.UK. To go into detail, to set up a Government Gateway user ID, which contains up to 12 characters, you will provide the details, such as your name, email address, password, and a recovery word which is easy to remember.
• After you have set up your user ID, you can easily register for self-assessment via your tax account.
• Following the registration, you will get your Unique Taxpayer Reference (UTR) via post within 15 working days. Nevertheless, if you live overseas, the number of days could extend to 21 days. For your information, your UTR is a ten-digit code through which the HMRC identifies you as a taxpayer.
• Next, you will link up your UTR to your Government Gateway account.
• Get your account activated using the activation code sent by HMRC.
• Finally, you can access your Personal Tax Account (PTA) to manage your tax records online.

Alternatively, a certified accountant can save you the hassle of following all the above-mentioned steps of filing your self-assessment and can efficiently and accurately file it for you.  

Understand your tax obligations:

Like every other business, sole traders also have income tax obligations. To illustrate, sole traders earning below £100,000 in a tax year can claim a tax-free income, better called a personal allowance. It is currently set at £12,570.

However, if you earn over £100,000, this allowance decreases by £1 for every £2 of income above £100,000. Likewise, if you are earning above £125,000, you cannot receive a personal allowance.

It is important to highlight after the personal allowance, the amount of income tax you pay depends on your income. Therefore, visit the government website to find out what rate of tax would apply to your income:

In addition, sole traders also have Class 2 NICs and Class 4 NICs to fulfil. To know the rates, go to the government website:

Submit your Self-Assessment tax return:

Sole traders must register and submit their Self-Assessment tax return (SA100) annually before 5 October after the end of the tax year (5 April) during which they earned taxable income. Similarly, the deadline for paper tax return submissions is 31 October. Also, the online deadline for filing is midnight on the 31 January.

It is always rational to register for a Self Assessment sooner rather than later because failure to meet deadlines might lead you to face penalties starting from £100.

Maintain accurate records:

Keeping accurate records of the important details across the tax year is an essential part of understanding how to register for self-assessment as a sole trader. To file an accurate self-assessment, sole traders must keep the major documents such as:

• All invoices and receipts pertaining to sales and income earned.
• Every Business expenses, such as office costs, travel expenses, and marketing.
• Bank statements and payment records.
• A record of every business expense you intend to claim.
• All VAT records if your business is VAT-registered.
• PAYE records if you have employed the staff.

It is worth pointing out that maintaining accurate records will help you complete your Self-Assessment tax return correctly and claim allowable expenses, which will trim down your tax bill.

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Pay your tax bill to HMRC:

After learning all the steps on how to register for self-assessment as a sole trader, you can pay your Self-Assessment tax bill via:

• Direct Debit by using your HMRC account.
• Bank transfer or online banking.
• Debit or credit card payments.

Interestingly, sole traders fall under the category of self-employment. Hence, if you want to know what other business structure falls under self-employment, read our guide:

What are the types of self-employed in the UK?

Conclusion:

To summarise, learning how to register for Self-Assessment as a sole trader is an essential step in fulfilling your tax obligations and maintaining compliance with HMRC. By following the above-cited steps, sole traders can ensure a smooth and uninterrupted registration process and avoid potential penalties.

Nevertheless, managing tax affairs independently cannot always be as easy as pie, especially for new sole traders. Therefore, to avert the tax-related strain, a skilled and location-based accountant from Accountingfirms can help you adequately in seamless registration with HMRC, maintain accurate financial records, and file your Self-Assessment tax return efficiently.

While the proficient accountants registered with us handle your tax obligations and ensure full compliance with HMRC tax regulations for you, you can centralise your efforts and energy in the right direction: growing your business. For hassle-free and efficient tax management, consider consulting a professional accountant today!

Disclaimer: The information provided on AccountingFirms.co.uk is for informational purposes only and should not be considered as financial advice. Always consult with a professional accountant to ensure compliance with UK laws and regulations.