How to set up as a sole trader and prepare your self-assessment tax return

8 Minutes

A guide to help you start your activity as a freelancer and filing your tax return to make the process smoother.

Starting your activity as a freelancer and filing your self-assessment tax return can feel daunting, especially if it’s your first time around as a sole trader. It can be confusing to determine what information to include. We have put together a guide to help you prepare and make the process as smooth as possible.

Starting your business

Identify your type of business

Sole trader
This is appropriate for anyone who is working for themselves and earn more than £1,000 from self-employment between 6 April 2020 and 5 April 2021. If you run your own business and don’t share profits with anyone else or work on your own as a freelancer, then you are a sole trader and submit a self-assessment tax return. You keep all of your profits but are also fully liable. You don’t need to file at Companies House as a sole trader.

If you share profits with at least one other individual, then you operate as a partnership. You are still self-employed, but profits, losses, risks, and liabilities are all split with your partners. It is required to file a tax return, but you don’t need to file at Companies House.

A limited liability partnership (LLP) is a corporate entity taxed similarly to a partnership. One key distinction is that an LLP must file annual accounts and a Compliance Statement to Companies House.

Limited company
A limited company is privately managed, owned by shareholders, and run by directors. A limited company is a separate legal entity from any personal affairs of the owners. Limited companies are required to report and file with Companies House and HMRC.

Timeframes and places to register

Important dates to know for the tax year from the 6th April 2022 to 5th April 2023:

Register with HMRC: 5th October 2022
Filing paper tax return: 31st October 2022
Filing online tax return and paying your bill: 31st January 2023

You must register for VAT if your turnover is over £85,000. You can register voluntarily if it suits your business, for example, if you sell to other VAT-registered businesses and want to reclaim the VAT.

Filling your tax return online

Your checklist

Before you can start working in the UK, you need a National Insurance Number. If you live in the UK and your parents have filled out a Child benefit claim, then you’ll be sent one automatically around your 16th birthday.

Otherwise, there are qualifications for a National Insurance number: you need to live in and be eligible to work in the UK, be at least 19 years old, have a Biometric Residence Permit (BRP), and have an EU passport or national identity card, Norway, Lichtenstein or Switzerland.

From here, you need to register with HMRC and start a self-assessment tax return. After registering, you will receive a 12-digit Government Gateway ID and a P10-digit Unique Tax Reference (UTR), respectively. Save these in a secure password protector instead of writing them on a piece of paper. We recommend having all of these materials well before you need to start filing your self-assessment.

You also need to register for National Insurance under Class 2 (if profits are greater than £6,515) and Class 4 (if profits are greater than £9,569). Class 4 is automatically calculated annually as part of your profits and included in your taxes once your self-assessment is complete. Class 2 is a flat-rate contribution, calculated weekly. You’ll need to pay in a lump sum later if you don’t register for National Insurance.

Important information to include

When preparing your financial statements, remember that the tax year runs from 6th April to the following 5th April. So only include information in that accounting year. Have the following sales and financial information ready ahead of time:

• Sales you invoiced customers during these dates.
• Sales for which you completed work but have not yet received an invoice.
• Sales to customers.
• Private sales of goods that relate to your business (through eBay, Gumtree, etc.).
• Grants you have received.
• Income statement from a trust.
• Rental property profit.
• Don’t include any personal income or other income unrelated to your business.
• Bank interest and tax information for any account associated with your business. You’ll need to file a separate foreign income page if you have foreign accounts with interest greater than £2,000. Otherwise, combine it with your UK bank interest.

A sole trader can also claim any business expenses. This includes office costs, travel, professional associations, technology, insurance, and large equipment used for more than a year. Large equipment like a new computer should be counted as a capital allowance. Be careful not to include any personal travel in these claims. Flights, car journeys, trains, and the likes must be associated with your business. Clothing can be included too, but it must be a uniform or worn only as part of the job. Keep your receipts on file until 2027.

Remember, it is important to file and pay on time. Otherwise, you could see a £100 fine from the HMRC.

Save Costs and Remove Guesswork with Payroll Software

Tax preparation can be time-consuming and daunting, especially if you’re trying to run a business simultaneously.

The right software can save you hours by managing timesheets and invoices automatically for you. Moonworkers is registered with HMRC and can automate most of the tasks above based on the details stored in our system. So remove the guesswork and the worry about your returns by using Moonworkers.

Nicolas Croix