Starting a new job or starting in business? Will you be Self-employed? Our 'At a glance' guide takes you through the key steps in getting started for tax, with links helping you drill down for more detail.
This is a freeview guide.
At a glance
1. You are planning to start a new business and your options are:
- Going self-employed as a sole trader.
- Running the business through a new company.
- Going into a partnership (you need two or more of you to run a partnership).
Note: If you are recruited and paid by an agency the chances are that will not be self-employed but an employee.
If you are unsure of your employment status there are four key things to consider:
Useful FREEVIEW guides if you are unsure whether you are self-employed or not:
2. Once you know that you will be 'self-employed', choose which 'trading style' or 'trading vehicle' is best for you?
- Your options are operating as:
- A sole trader (running a business on your own or with employees).
- A partner in a partnership (running a business with someone else).
- A director and shareholder: running your own company (on your own or with others via a limited company).
If you are unsure of the different trading styles and vehicles, these guides take you into more detail:
3. Do you want to consider tax advantages and cost savings?
There may be some key advantages as a start-up in setting up as a sole trader than via a company or partnership: it depends on individual facts and circumstances.
- It is very easy to set up as a sole trader: this is the recommended route for someone starting up a small business on their own for the first time.
- Once you have set up as a sole trader, it's easy to change into a partnership (say if a friend comes to join your business) or into a company (if you get bigger and want the protection of limited liability).
- It is less easy to convert backwards: changing from a partnership back to a sole trader is easier than changing from a company back to a sole trader.
Compare different trading styles and trading vehicles with these guides:
4. What are the legal requirements to set up in your choice of trading vehicle?
- There is no legislation that directly describes the operation of a sole trader: sole traders run their business according to the principles of general law.
- Certain businesses, such as taxis and scrap metal dealers are subject to meeting the rules on tax Conditionality. Licence renewal (which excludes the first issue of a licence) is conditional on the business completing a tax check confirming they are registered for tax.
- Partnerships are governed according to different Partnership Acts and the Companies Act which variously apply to the different types of UK partnerships. These acts set out various defaults:
- 1907 Limited Partnership Act.
- 2000 Limited Liability Partnership Act.
- 2006 Companies Act.
- Even best friends can fall out: it is advised to draw up a partnership agreement that deals with how you split profits or capital and what happens if you part company.
- We do not provide a template at this time because partnerships vary so greatly in size and activities that we don't think that a 'one size fits all' approach is ever suitable.
See our guide A new Partnership: Start here...
- If you chose to trade through a company, the starting point is to form a new company with Companies House.
- Companies can be unlimited, limited by guarantee or limited by shares.
- If you are running a not-for-profit organisation then you may consider being limited by guarantee.
- The majority of trading companies are limited by shares.
- Before you get started you need to plan your share classes, and consider whether to modify the Articles of Association and/or draw up a shareholders' agreement. You can also make amendments following formation.
- You must also appoint first directors and a company secretary, and decide on the location of the company's official address, the Registered Office.
See our guide Starting a company: Start here...
5. Trading names
Your business needs a name. It can be just your name or you may want something original to stand out in order to attract new clients online and you will probably require a website.
6. Registration for tax
Registration with HM Revenue & Customs
If you start in business, whether as:
- A self-employed individual.
- An individual in a partnership.
- A company.
You must open an account on the Government Gateway www.gov.uk and register with HMRC. You will need to upload your ID and proof of address.
- Under Self Assessment you must notify HMRC if you have taxable income or chargeable capital gains in a tax year.
Employers (individuals, partnerships or companies)
If you are going to employ any staff you must register with HMRC and operate PAYE.
- Separate online notification and registration with HMRC are required if you take on workers and employees.
- You must assess any worker's employment status.
- Certain categories of workers are automatically deemed to be employees for tax purposes (this does not always confer any employment rights on them).
- You must pay employees via a payroll and deduct PAYE & Real-Time Information reporting (RTI).
- If you trade via a company and you are paying yourself a salary or any benefits, or if you trade via any type of business entity and you take on employees or pay your directors, or you make available employment type benefits, you will need to set up a PAYE scheme.
- See RTI of PAYE for employers.
Construction industry Employers: Construction Industry Scheme (CIS)
If you are a contractor you must operate the CIS on your workers unless they are employees or their work is outside the CIS scheme.
- If you are a sub-contractor you must register with HMRC otherwise you will have tax deducted from your income at 30%.
- See CIS: Contractors and Subcontractors.
You must register for VAT if:
- You expect your turnover in the next 30 days to exceed the registration threshold of £85,000 in 2022-23 see Registering for VAT.
- You have taken over a business as a Transfer of a going concern.
- You have taken over the business premises of a VAT-registered business and are carrying on a similar trade, see VAT: Taking over an existing business.
- When you register for VAT you must join Making Tax Digital for VAT.
- See MVD tool: who has to join?
If you don't have to register for VAT you can choose to do so if you will be making taxable supplies.
7. Record keeping and accounting for tax and sole traders and partnerships
You have a choice of kind of 'system' you use for tax.
- You can use cash basis accounting: this means that you declare your income and deduct your expenses according to when you receive payment or make a payment.
- The alternative is the accruals basis: this basically means that you declare your income and deduct your expense when invoiced.
Most small businesses stick to the cash basis as it's pretty simple to use.
You can also decide to use a system of fixed-rate expenses, instead of claiming your actual costs.
For example, HMRC allows you to use a mileage rate of 45p/25p per mile, if you use those rates you only need to record your mileage and not have to retain your fuel bills.
These things are supposed to simplify accounting for tax but they are very confusing.
- Neither method is in practice simple to use: each has several drawbacks.
- We compare the different systems: keep an open mind about which system to use until trading is underway.
See our fantastic guide Accounting: Simpler Income Tax (cash basis)/fixed expenses
- Companies file their accounts with Companies House, in different formats according to their size.
- Small companies have the option of filing abbreviated accounts or micro-entity accounts.
- Company accounts are prepared according to Generally Accepted Accounting Practice (GAAP).
- Top tip: it is definitely recommended use an accountant to prepare company accounts and tax returns unless you want to study UK GAAP and invest in special software.
- See UK GAAP & FRS
8. Miscellaneous FAQs
Pensions: you can contribute to a pension scheme as a method of saving for your retirement or passing down your wealth to your family when you die.
If you take on employees, you will need to set up a workplace pension scheme.
9. Tax Planning
Tax planning guides are available throughout the website, see the left-hand menu.
A handy index for company owners is:
See Indexes to essential guides in this series
Starting up: Index
|Guide & link
Starting work 1. Self-employed or Employed?
What is the difference between being self-employed and employed?
|Starting work 2. Special rules for certain types of worker.
Are you starting a new business or is it a 'gig' job?
You might not be thinking you are starting a business: your employer may decide that you are self-employed alternatively the tax rules may deem that you are someone's employee and not self-employed after all.
Starting work 3. How employees are taxed.
How are employees taxed?
Starting work 4. How the self-employed are taxed.
What are the tax rules if you are self-employed?
|Self-employment: Registering for tax
|How to register for tax, when to register, when to pay tax
Running a new business: understanding what 'trading styles' or 'trading vehicles' can you use?
Is your intended business a trade, a profession or vocation, or an investment activity? The distinction is significant not only for tax purposes but also for setting up the right ownership structure.
Which trading structure is suitable for me?
All things considered so far: which structure is going to work best? A sole trader, in partnership, or running a company?
Can you explain the different types of partnerships? A concise comparison of the different types of partnerships recognised in the UK.
Sole trader v limited company:
'At a glance' can we compare the tax and legal treatment between being a sole trader and running a company?
From a purely tax point of view, it is more efficient to run your business as a sole trader or as a company?
Will I pay less tax if I work via an LLP?
Different types of trading structures all have their own tax advantages and disadvantages: what are the key issues if you run an LLP?
Which Capital Gains Tax (CGT) reliefs apply when a person, replaces or disposes of an asset used by a business, the whole or part of a business, or shares in a company?
Have a plan
- Start a new business with a business plan.
- It does not have to be long, just enough to map out your goals and provide a checklist of things to do.
- One secret to establishing and running a successful business is to never stop planning and to keep following and updating your business plan.
Start as a sole trader
- Unless you are going to use an accountant or a tax adviser, it's the simplest way to trade. You can always convert into a limited company or a partnership at a later date.
Chose your trading or business name with care
- You will want to ensure that you find a name that will give you an original internet domain and social media account. Double-check by making a comprehensive search of your intended name before you buy domains etc and register for tax.
Register for tax and National Insurance as soon as you start trading
- You will be fined if you fail to register or fail in your tax reporting and payment obligations.
Accounting and tax software
- Do some careful research before you buy. Some packages are very complicated and not ideal if you have no bookkeeping experience.
- Consider outsourcing your accounting and tax work: it might be cost-effective.