Set up and register as self-employed

Setting up as a self-employed sole trader is the simplest and quickest way to start a business. There isn’t much paperwork to do. There are no registration fees to pay, but you must register with HM Revenue & Customs for tax and National Insurance purposes. Record keeping and accounting is straightforward, and there are the benefits of being your own boss.

This guide explains the consequences of, and the legal requirements for, setting up as a sole trader. You will find out how to meet your tax responsibilities by filling in your Self Assessment tax return each year and paying your tax and National Insurance. Finally, our checklist will help you make sure that you have put your business on a proper legal footing.

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Setting up as self-employed

Anyone can set up in business as a sole trader, although for certain types of work you may need a licence or permission from your local authority. Restaurants, childminders, cab drivers and street traders, for example, all need to have a local authority licence. Your qualifications and business premises may be inspected beforehand to ensure you comply with regulations.

Working from home

If you run a business from home, you may have to pay business rates for the part of your home that you use for your business. This mainly depends on whether the business area of your home is also used for domestic purposes. If you simply work on a computer in a bedroom, for example, you will probably not have to pay business rates. See our guide: business rates – an overview.

You may need to get planning permission to set up a business at home. For example, if your business could cause a nuisance to your neighbours, or if you intend to do any building work to adapt your home. If in doubt, contact the planning department of your local authority. Find planning permission guidance on the Planning Portal website [opens in a new window].

Bear in mind that there may also be restrictions in the deeds of your property or, if you rent, in the rental or lease agreement.

Choosing a name for your business

You can trade under your own name, eg M.Y.Self, or use another business name, eg Peerless Promotions.

If you decide to use a business name, you must make sure that your business stationery displays your name as well as the trading name of the business for example, M.Y.Self, trading as Peerless Promotions.

Your trading name should not be the same as, or too similar to, that of a business which already exists. Be careful that it does not contain words that people might find offensive or misleading. See our guide on how to choose the right name for your business.

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Registering for tax and National Insurance

You can let HM Revenue & Customs (HMRC) know about your new self-employment by registering online for business taxes. HMRC will need to know information about yourself and your business to set up tax records for:

• Self Assessment
• National Insurance
• PAYE if you have people working for you

A Self Assessment Online account will be set up for you automatically at the same time.

Once you’ve registered, HMRC will send you a Unique Taxpayer Reference number and you’ll then complete a Self Assessment tax return each year.

Even if you already complete a Self Assessment tax return, you can still complete a Self Assessment registration form to tell HMRC about your self-employment.

It’s best if you register as soon as you become self-employed.  You must register at the latest by 5 October after the end of the tax year for which you need a tax return. The tax year runs from 6 April one year to 5 April the next. So if, for example, you have tax to pay on your business profits for the 2020-21 tax year, you need to let HMRC know by 5 October 2021.

Register your business for HMRC taxes

If you register late you may have to pay a penalty.

Registering for the Construction Industry Scheme

If you are a contractor and/or a sub-contractor in the construction industry, you must also register with the Construction Industry Scheme.

For more information, see our guide: what is the Construction Industry Scheme?

Registering for VAT

If you expect your business to have turnover of more than £73,000, you will need to charge VAT to your customers and pass this on to HMRC.

Registering as an employer

If you employ other people in your business you need to collect and pay income tax and NICs, which will mean operating a PAYE (Pay As You Earn) system. See our guide on PAYE for employers: the basics.

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Arranging to make National Insurance contributions

As well as registering with HM Revenue & Customs (HMRC) so that they can set up records for your tax and National Insurance contribuions (NICs) you’ll need to arrange to pay Class 2 NICs. For the tax year 2011-12 the Class 2 NICs rate is £2.50 a week.

The most convenient way to pay Class 2 NICs is via Direct Debit. Paying by Direct Debit has many advantages:

• it’s easy to set up – just fill in the application form and send it to HMRC – you will need a suitable account at a bank or building society
• it runs automatically – once set up, you don’t have to remember to make payments
• you can choose to pay monthly or six monthly
• it helps your budgeting – for people in business, good cash flow and budgeting are essential and paying by Direct Debit means that your payments are always made in arrears of your liability
• it gives you peace of mind – payments are made on time, every time and there is no risk of losing benefit because you forgot to pay

Find an application form to pay Class 2 NICs by Direct Debit on the GOV website [opens in a new window].

If you are unable to pay by Direct Debit, HMRC will issue you with bill reminders in April and October showing the amount due by 31 July and 31 January respectively.

Applying to be exempt from paying Class 2 NICs

If you expect your income from your business to be low for the tax year you may not have to pay Class 2 NICs. To find out more please download form CF10 Self-employed people with small earnings.

Find form CF10 for self-employed people with small earnings on the GOV website [opens in a new window].

To read more detail on both Class 2 and Class 4 National Insurance if you’re self-employed, see our guide on self-employed tax and National Insurance.

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Checking your self-employment status

If your work comes from more than one source it is possible to be employed in one or more jobs – with your employer deducting tax and National Insurance – and self-employed in others.

If you’re not sure whether your work counts as self-employment, ask yourself these questions:

• Do you have the final say in how the business is run?
• Do you risk your own money in the business?
• Are you responsible for meeting the losses as well as taking the profits?
• Do you provide the main items of equipment you need to do your job, not just the small tools many employees provide for themselves?
• Are you free to hire other people on your own terms to do the work you have taken on? Do you pay them out of your own pocket?
• Do you have to correct unsatisfactory work in your own time and at your own expense?

If you answer ‘yes’ to most of these questions then you are probably self-employed already. To find out how to tell HM Revenue & Customs (HMRC) about your self employment, see the page in this guide on registering for tax and National Insurance.

The latest you can register with HMRC is 5 October after the tax year for which you need to submit a Self Assessment tax return – for example 5 October 2011 for the 2010-11 tax year. If you register late, you may be charged a penalty.

To better understand your employment status, use the Check Employment Status for Tax (CEST) tool on GOV website [opens in a new window].

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Checklist: setting up as self-employed

To set yourself up as self-employed there are several things you must do. Make sure that you:

• register straight away for Self Assessment with HM Revenue & Customs (HMRC) so they can set up your tax and National Insurance records
• obtain any permits and planning permission that you may need from your local authority
• contact your local authority to find out whether you need to pay business rates
• contact HMRC to register for VAT if you expect to have turnover of more than £73,000 a year
• register with HMRC for PAYE (Pay As You Earn) if you employ staff
• register with HMRC if you are a contractor or subcontractor in the construction industry
• set up a financial record-keeping system
• put your name on all your business stationery, including letters, invoices, receipts and cheques

It’s worth remembering, though, that this is just a start. As you continue in business, you may well have other legal and tax issues to bear in mind.

The Citizens Advice Bureau provides additional information on a wide range of self-employment topics and gives a list of other organisations to contact for specialist advice.

Find sources of advice on our Self-Employment Checklist.