The Formalities Of Becoming Self-Employed
It’s relatively easy to start out as a sole trader, but you should always follow healthy accounting habits to set you up for success!
So, you’ve decided to join 3.5 million sole traders in the UK by setting up in business by yourself! Setting up as a sole trader is by far the quickest and easiest way to launch a new venture and requires very little in the way of formalities! This guide will inform you about your obligations with HMRC and explain the best way to keep track of your finances which will make it easy when it comes to reporting your earnings at the end of each tax year!
Informing HMRC
Unlike setting up a limited company, which requires you to appoint directors and a company secretary as well as registering with Companies House, it is refreshingly straightforward to start out as a self-employed person, otherwise known as a sole trader.
You’ll need to pick a business name for yourself and then let HMRC know about your plans so that they’re aware that you’ll need to fill out a self-assessment tax return each year.
Select Your Accounting Method
HMRC will advise you about the type of records that you should keep to prove your earnings. You can also gain advice from them about how you should report your earnings, whether using traditional accounting or cash basis accounting.
With traditional accounting, you keep a record of the date that you invoiced someone, and that entry will fall within the tax year’s accounting period even if you did not receive the actual income until a few weeks later. If you feel that this will be inconvenient for you, then sole traders who are expected to earn less than £150,000 per year can decide to use cash basis accounting instead which only uses figures of income that has actually been received as well as invoiced for.
Choosing Your Bank Account
One of the drawbacks of being a sole trader is that the HMRC does not differentiate between you and your business. Without limited liability, your own assets are at risk if your business is to fail. As a result, you’re not obliged by HMRC to open a separate bank account for your business, but a professional accountancy services Peterborough team recommends that it is usually a good idea to do so. In fact, depending on the scale of your business and the number of transactions coming in and out, some banks will insist that you open a business bank account which is separate from your own personal funds.
Although there may be a monthly cost associated with having an additional bank account, the benefits to you are that it’s far easier to keep track of your income and expenses when you separate your business finances from the figures used to fund your home life. When filling in your tax return, it’s frustrating to have to weed through endless Tesco transactions for your weekly grocery shop before you find that vital business expense that you need to log as part of your tax return.
Now that you’re ready to start out as a sole trader, it’s time to put a proper record-keeping system in place to allow you to keep on top of your finances and have a firm grasp of the success of your new venture!
