Simplified tax for sole traders

Today I took the plunge, and became freelance. I registered as a sole trader. Before filling out the paperwork, I researched everything for two hours. To register, it took ten minutes.

As I read, I decided to write a blog about how to register as being a sole trader in the UK, so that no one else needs to go through dozens of pages on HMRC totally mystified.


Starting a new journey into freelancing is scary enough. Time to learn about tax

What did you find out?

My main concern was, and is, tax. Very few freelance websites talk about this, and there are lots of different types of tax. I wanted to know which ones applied to me and how much I need to pay. It turns out that even without registering, everyone is considered to be a sole trader. Without registering, you still need to pay your taxes. These are:

  • Income tax
  • National Insurance (Class 1, 2 and 4)
  • VAT


Okay, how much?

I made this chart, which puts all the different taxes in one place.

Basically, if you earn less than £155 a week, you won’t qualify to pay any of these taxes. It’s only when you earn £156 in one week that you will need to pay Class 1 National Insurance for that week.

You need to pay if you earn How do I pay this? How much will I need to pay?
Income tax between 11k and 43k per year Online self-assessment 20%
National Insurance Class 1 – more than £155 per week Online tax return 12%
Class 2 – more than £5965 per year Online tax return £2.80 per week
Class 4 – more than £8060 per year Online tax return 9% on profits between £8,060 and £43,000
Business tax ‘VAT’ more than 83k per year Until this point, you don’t need to register for VAT

(These figures were correct May 2016)


What counts as ‘earnings’?

It sounds straight forward. Your ‘earnings’ are the money you make from your employment. It includes the profits you make from self-employment, most pensions and any rental income (to name a few examples.)

If you’re employed elsewhere, perhaps in a part-time job, you also need to distinguish between the money you make from your self-employment, compared to your ‘regular’ employment.


That sounds complicated

Well, it can be, but it doesn’t need to be.

You can register as a sole trader, and for all of these types of tax in one place, and the online tools which will help you to complete the paperwork, with a Government Gateway account.


Top tip: While registering I breezed through one screen, and didn’t see my User ID. This is a unique number used as your login detail, and won’t be displayed again, so write it down! You’ll need it every time you log in. It’s 12 digits long. Write it down.


But I’m not going to make much money, do I have to register?

Yes, you should register. You can be fined if you don’t. And anyway, freelancers who are only dabbling in a few small commissions probably won’t have to pay tax.


What if I get a job elsewhere?

You can stop being self-employed at any time, filling out a form on the HMRC website. You can also restart your business after a hiatus, so if working for yourself doesn’t work for you during one stage of your life, there’s no reason why you can’t try again later.


So, I’ll register. Then what?

You’ll need to keep track of sales and income, expenses, PAYE (pay as you earn) records, and details of any of your other personal income. I’m going to be trying some free software called ‘Wave’, and will write a review about how I find it.


I’ll also write about how I’m finding submitting my own taxes, so if this is the reason you’ve been hesitant to register as a sole trader, hopefully I’ll be able to clear up any confusion you may be experiencing.


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