How to set up as self-employed in the UK

You must tell HMRC that you have started trading. The deadline is 5 October following the end of the tax year in which you began. Start trading in June and your deadline is 5 October of the following year — sixteen months later. Start in March and your deadline is 5 October seven months later. It is the tax year that governs, not your start date, and that is exactly why people miss it.

Register through GOV.UK, which routes you through the sole trader registration service. You will need your National Insurance number, your address, the date you started trading, and a description of what you do. If you have never filed a Self Assessment return before, this registration also enrols you for it.

HMRC then issues a Unique Taxpayer Reference, the ten-digit UTR, by post. Nothing can be filed without it, activation codes arrive separately, and the whole sequence takes real time. Registering the week before a filing deadline does not work.

Missing the registration deadline is a failure to notify, and it attracts a penalty based on the tax you should have paid. The penalty is reduced substantially where the disclosure is unprompted — that is, where you come forward before HMRC contacts you. This is the practical rule: if you have missed it, register now rather than waiting for the next tax year to tidy it up.

Registration is not the same as needing to pay tax. You may register and owe nothing because your profit is below the personal allowance. You register because you are trading, not because you are profitable.

You are trading if you are supplying goods or services on your own account with a view to profit, regularly and commercially. Selling personal possessions you no longer want is not trading. Buying to resell, making things to sell, or providing services to clients is. The badges of trade — frequency, intention, organisation, modification of goods before sale — are what HMRC looks at when it is ambiguous.

Where your total income from casual self-employment is very small, the trading allowance may mean you have nothing to declare and no need to register at all. The threshold is set by HMRC and changes, so check the current figure before relying on it. Note that claiming the trading allowance means you cannot also deduct expenses.

A sole trader is not a separate legal entity. You own the assets, you owe the debts, and a creditor of the business is a creditor of you personally. If a client sues, or a supplier is unpaid, or a piece of equipment injures somebody, your house and savings are in the frame. Professional indemnity and public liability insurance are how sole traders manage that, and for most trades they are not optional in practice.

A limited company is a separate legal person registered at Companies House. It owns its assets and owes its debts, and the shareholders' liability is limited to what they have put in — unless they have given personal guarantees, which banks and landlords routinely require from small companies, and which quietly reverse the protection.

The cost of a company is administrative rather than financial. Annual accounts and a confirmation statement at Companies House, corporation tax returns, PAYE if you take a salary, dividend paperwork, and a public record of your directorship and registered office. Directors also carry legal duties that a sole trader does not, and the consequences of getting them wrong are personal.

The tax comparison genuinely does change. Whether extracting profit as salary and dividends beats sole trader profits depends on corporation tax rates, dividend tax rates and thresholds, National Insurance rates and the level of profit — all of which move at each Budget. Anyone who tells you a company is always better, or never better, is describing a snapshot. Get the comparison run on current rates for your actual numbers.

Partnerships sit between the two: two or more people trading together, with a nominated partner filing a partnership return and each partner also filing their own. In an ordinary partnership the partners are jointly liable for the partnership's debts, so the liability exposure is at least as wide as a sole trader's. A limited liability partnership is a separate structure with its own filing obligations.

The pragmatic sequence for most people is to start as a sole trader, because it is free, immediate and reversible, and to incorporate later when the liability exposure, the client requirements or the tax arithmetic justify it. Moving from sole trader to company is straightforward. Unwinding a company you did not need is not.

Some clients — particularly large firms and public bodies — will only contract with a limited company, and some sectors effectively require one. If that describes your market, the decision has been made for you and the question is only when.

Self-employed National Insurance comes in two classes and they do different jobs. Class 4 is a percentage of profit above a threshold and is purely a tax — it buys no entitlement. Class 2 is the contribution that builds your National Insurance record for the State Pension and certain contributory benefits. The rules on when Class 2 is treated as paid, and when it can be paid voluntarily by people with low profits, have changed in recent years, so check the current position rather than assuming.

That distinction matters for anyone with low or intermittent profits. If your profits fall below the level at which Class 2 is automatically treated as paid, you may be building no pension entitlement for that year. Paying voluntarily is usually far cheaper than losing a qualifying year, and it is a decision worth making annually rather than discovering at retirement.

You must keep records of all business income and expenses, plus personal income, for the period HMRC specifies. Records include invoices raised, receipts, bank statements, mileage logs, and anything supporting an expense claim. HMRC can and does ask for them, and an expense you cannot evidence is an expense you did not have.

Allowable expenses are costs incurred wholly and exclusively for the business: stock and materials, business premises costs, staff costs, travel that is not ordinary commuting, professional fees, insurance, marketing, phone and internet used for work, and capital allowances on equipment. Where something is used both privately and for business, only the business proportion is allowable, and you need a defensible basis for the split.

Simplified expenses exist for the common awkward cases. Flat rates are available for business mileage in your own vehicle, for working from home based on hours worked, and for living in your business premises. They are optional, and for some people the actual-cost method gives a better answer — the point is to calculate both once rather than defaulting.

Making Tax Digital for Income Tax is the significant change to all of this. Once you are in scope, based on qualifying income and the phase timetable, you must keep records digitally in compatible software and send quarterly updates to HMRC, followed by a final declaration. Whether you are in scope now depends on thresholds HMRC publishes and revises, so check your own position on GOV.UK rather than relying on any summary.

The practical response is to use accounting software from the start even if you are not yet in scope. Reconstructing a year of records into software after the fact is significantly harder than entering them as you go, and the software also solves the problem of knowing what you owe before the bill arrives.

VAT registration becomes compulsory once your taxable turnover exceeds the registration threshold on a rolling twelve-month basis, or when you expect to exceed it in the next thirty days alone. Turnover, not profit — a business with high turnover and thin margins can cross it easily. The threshold is set at each Budget, so check the current figure.

You can register voluntarily below the threshold, which lets you reclaim VAT on purchases. That is attractive if your customers are VAT-registered businesses who can reclaim what you charge, and unattractive if they are consumers who cannot, because you have effectively raised your prices. This is a market question rather than an accounting one.

The Construction Industry Scheme applies to construction work, and it works differently from anything else. Contractors deduct money from subcontractors' payments and pass it to HMRC as an advance payment towards the subcontractor's tax and National Insurance. Subcontractors should register — unregistered subcontractors have a higher rate deducted — and many end up owed a refund at the end of the year because too much was withheld.

If you take on staff, you become an employer and need PAYE, real time reporting, employers' National Insurance, auto-enrolment pension duties and employers' liability insurance. Engaging someone as self-employed to avoid this does not work if the reality of the relationship is employment; HMRC and employment tribunals both look at substance rather than labels.

Some activities need licences or registration regardless of tax: food businesses register with the council, taxi and private hire drivers are licensed locally, waste carriers register with the environmental regulator, and financial, legal, health and childcare activities are separately regulated. Trading without a required licence is an offence quite apart from any tax question.

If you work from home, check your mortgage or tenancy for restrictions, tell your home insurer, and consider whether business rates could apply to a part of the property used exclusively for business. Most home-based sole traders are unaffected, but a converted outbuilding used only for the business is a different matter.

Payments on account are the cash-flow shock that catches almost every first-time filer. Where your Self Assessment bill exceeds a threshold, HMRC requires two advance payments towards the following year, on 31 January and 31 July. The first January bill can therefore be one and a half times the tax for the year you have just completed. Plan for it from the first month of trading, not from the January it arrives.

Income Tax on self-employment profits is not fully reserved. Scotland sets its own Income Tax rates and bands for non-savings, non-dividend income, which includes self-employment profit, so a Scottish taxpayer's bill on identical profits differs from a taxpayer's elsewhere in the UK. Scottish rates are set annually by the Scottish Parliament and have diverged materially from the rest of the UK.

Wales has Welsh rates of Income Tax within the UK structure. To date the Welsh rates have been set to match the rest of England and Northern Ireland, but the power to diverge exists and is exercised annually, so a Welsh taxpayer should check rather than assume permanence.

National Insurance, VAT, corporation tax and the registration process itself are reserved and identical everywhere. HMRC is a UK body, the UTR is a UK reference, and the Self Assessment deadlines of 31 October for paper and 31 January for online returns apply throughout.

Business support is devolved and differs a great deal. Business Wales, Business Gateway in Scotland, Invest Northern Ireland and the network of local growth hubs in England each run their own advice, grants and start-up programmes, and eligibility for them turns on where the business is based. Start with your own nation's service rather than the GOV.UK business pages, which do not describe devolved support.

Business rates, licensing and planning are devolved or local everywhere. A home-based business, a shop or a workshop faces different rates relief schemes in each nation, and Scottish and Welsh small business rates relief schemes are distinct from the English one. Check with the local council or the devolved administration before assuming a relief exists.

For anyone trading across a UK border — a Northern Ireland business selling goods to Great Britain or the EU in particular — the customs and VAT position is more involved than it is for purely domestic trade, and it changes. Get that checked specifically rather than treating it as a footnote.