Set up and register as self-employed

Tax matters

As a sole trader you will have to pay income tax on any profits from your business. You must fill in a self-assessment tax return each year, detailing your income and expenses. See our guide on tax returns for the self employed.

Make sure you register as self-employed with HM Revenue & Customs (HMRC) as soon as you start up in business on your own. If you fail to do this within the first three full months of becoming self-employed, you may have to pay a penalty of £100. Download a form to register as self-employed from the HMRC website (PDF, 61K) - Opens in a new window.

National Insurance

You'll have to make flat-rate Class 2 National Insurance contributions (NICs) throughout the year - £2.40 a week for 2009-10. HMRC recommends paying your Class 2 NICs by direct debit. Setting up a monthly direct debit is easy, it runs automatically, helps your budgeting and gives you peace of mind.

If your annual profits are over a certain amount - £5,715 in 2009-10 - you will also have to pay Class 4 NICs. You pay these along with your income tax - the amount you have to pay is calculated from your self-assessment tax return. See the following guides for more information:

• Class 2 National Insurance contributions
• Class 4 National Insurance contributions
• National Insurance: the basics

You can also use our interactive tool to identify what National Insurance contributions you must pay.

VAT

If your business has - or you expect it to have - a turnover of more than £68,000 a year, you must charge your customers VAT and send it to HMRC. Use our interactive tool to find out if you need to register for VAT.

Employees

Sole traders can take on employees just like any other business. If you do, you will need to collect income tax and NICs from them and pay these to HMRC. You will therefore need to operate a PAYE (Pay As You Earn) payroll.

Keeping records

You must keep all the financial records you will need to fill in your tax returns. For a list of the requirements, see our guide on how to set up a basic record-keeping system.

The construction industry

Special rules apply to subcontractors in the construction industry. Download a guide to the Construction Industry Scheme from the HMRC website (PDF, 296K) - Opens in a new window.

Get help

Use our interactive tool to get a beginner's guide to tax and accounts rules.

HMRC Business Support Teams can give you practical advice. Find your local Business Support Team on the HMRC website - Opens in a new window.

You could also ask an accountant to help you with your tax returns or use one of the commercially available software packages.

Subjects covered in this guide

• Introduction
• Before you start
• Tax matters
• Self-employment status
• Checklist: setting up as self-employed

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