Becoming a business owner may have a number of upsides, from choosing your own work hours to the nature of the work you do. But how do you register for tax, and what is the difference between a sole trader, partnership and a limited company? In this guide we explore the ins and outs of registering for tax.
Ways of working for yourself
Terms like ‘self-employed’, ‘freelancer’ and ‘being your own boss’ are often spoken about interchangeably, but in reality there are different ways of ‘working for yourself’. Before you register for tax , you’ll need to decide which legal structure to use for your business, as this effects everything from your tax responsibilities to how you and your business are taxed, as well as legal liability and other issues.
Here are the three main ways people can set themselves up :
- Sole trader – a self-employed person who is the exclusive owner of their own business, without any entity such as a partnership or limited company.
- Partnership – this is where you jointly own a business with one or more co-owners (partners).
- Limited company – the business is owned by a separate legal entity registered with Companies House and you and/or others own shares in the company . You manage the company as a director and exercise control over the company through your shareholding.
How tax works when you’re self-employed
You are likely to need to register and submit a self-assessment tax return with HMRC each year, as well as pay Income Tax and National Insurance contributions. This is because you are generally taxable on self-employment profits from a sole trader business or partnership, or dividends and salary from a company above certain thresholds.
If you operate through a company, you will also be obliged to register with HMRC for Corporation Tax and file a Company Tax Return.
Additionally if your taxable turnover exceeds the VAT registration threshold, you will need to register for VAT and charge VAT on your taxable services, but you may also be able to recover VAT on your purchases. If you employ staff, you will likely also need to register for PAYE and NIC.
You may wish to use an accountant to help you prepare your tax returns and deal with HMRC on your behalf, though you’ll be responsible for accurate bookkeeping.
How to register as self-employed
There are different ways to register as self-employed depending on which legal structure you choose for your business. Here we take you through the process for whichever route you go down.
Setting up as a sole trader is considered by many to be the simplest route to run a business. The quick registration process is as follows:
- You must register for Self-Assessment with HMRC if you’re filing your first tax return, then subsequently complete a return each year.
- You’ll need to prove your identity – for example, with a passport or photocard driving license – through the Government Gateway or GOV.UK Verify service .
If you’re buddying up with one or more partners in your self-employed journey, here are some steps you’ll need to take:
- Select a name for your business partnership – rules apply.
- Choose a ‘nominated partner’, who is responsible for keeping records about your business, registering the partnership with HMRC, and preparing a partnership tax return .
- Partners are likely to need to register with HMRC (separately to the nominated partner) and ultimately, complete individual tax returns.
Here are some steps you’ll need to take when starting a limited company:
- Choose a company name – you should avoid names that are too similar to another company or trademark.
- Appoint a director (legally responsible for running the company) and if you like, a company secretary who is authorised to manage some of the director’s responsibilities .
- Pick your shareholders – you will need at least one – or a guarantor. You will need to disclose the percentage of shares owned by individuals in your company, and who has voting rights.
- Prepare legal documents such as the memorandum and articles of association.
- Register with Companies House to obtain your certificate of incorporation, which confirms your company’s legal right to exist. You can also register for Corporation Tax at the same time.
You may wish to use an accountant for additional support, and setting up a business bank account for your company may make it easier to track your transactions when preparing your tax returns.
Am I self-employed?
The definition of self-employment can get a little blurry. A sole trader or business partner can be considered self-employed, as they are not employed by someone else and aren’t paid through the PAYE system for their self-employed work. A sole trader isn’t legally entitled to employment rights such as annual leave and sick pay.
Company directors are technically office holders and taxed like employees. You cannot currently claim under the Self-Employment Income Support Scheme (SEISS) as a limited company director.
It’s also possible to be a permanent employee for a separate job and also self-employed for your own business; for example, a worker with a full-time or part-time job who separately sells products through a website.
Start your self-employed journey
Once you’ve registered for tax and got the initial admin out of the way, there are lots of opportunities and freedoms you may be able to enjoy with the right preparation behind you. Read our guides on Tyl Talks for more help with the day-to-day running of your business.
This has been prepared by Tyl by NatWest for informational purposes only and should not be treated as advice or a recommendation. There may be other considerations relevant to you and your business so you should undertake your own independent research.
Tyl by NatWest makes no representation, warranty, undertaking or assurance (express or implied) with respect to the adequacy, accuracy, completeness, or reasonableness of the information provided.
Tyl by NatWest accepts no liability for any direct, indirect, or consequential losses (in contract, tort or otherwise) arising from the use of the information contained herein. However, this shall not restrict, exclude, or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.