Here’s everything you need to know to make sure your side hustle is legitimate including the difference between being a sole trader and a limited partnership, which might be right for you, and the deadlines and paperwork you need to consider
In any relationship there’s a time to make it official - and at least when it comes to registering a business, no one’s arguing about cake.
But even though the seating plan is straightforward - there’s still plenty of rules and regulations you need to consider, or you could find yourself on the wrong side of the taxman.
So to make your trip to the registry office as straightforward as possible, we've rounded up the key information you'll need from the difference between being a sole trader and a limited partnership to the deadlines and paperwork you can't avoid.
If you’ve got ambitions to start your own company, then you need to know when to register the business.
The good news is, you usually don’t have to do this straight away, which means you have time to see if your business idea has legs, before declaring anything to HMRC.
In 2017, the government introduced something called the tax-free trading allowance, which lets you earn up to £1,000 a year from self-employment, without registering the business or paying tax on the earnings. This could be from selling things online, renting out equipment, babysitting, or your new fledgling company.
Remember, this £1,000 allowance applies to income, rather than profit, so if you’ve earned over the threshold then you legally must register the company even if your expenses were high. What this involves depends on which kind of structure you choose.
There’s also lots of benefits to registering the company, including tax advantages, reclaimable business expenses or even just showing potential customers that you’re legitimate. Here’s what you need to know before getting started.
There are several kinds of structure available to you when registering your business. Each has different implications in terms of how much tax and National Insurance you pay.
An accountant can advise you on the best structure for your business depending on your profits, the kind of work and how much you earn.
The three main options are:
This is the simplest type of tax structure for your business. You run the company as an individual, and you’ll pay tax on your income at the same rates and thresholds that you would if you were employed. One risk with this approach is that you’re personally responsible for any debts accrued by the company.
You don’t have to register the company with Companies House, though you can still choose to do so.
All you need to do is register as self-employed with HMRC. You can’t opt for this structure if you plan on having any employees, it’s specifically designed for individuals running businesses.
This is when you go into business with more than one other person, and you all have responsibility for the new company.
You need to draw up an agreement that explains how profits are divided and you will each have to do self-assessment and pay tax on your share of the profits.
All the partners will have Joint and Several Liability for debts, which means everyone is on the hook for repayments.
One person will need to be ‘nominated partner’ – they are responsible for managing the partnership’s tax returns and keeping business records. Find out more about partnerships on the Gov.uk website.
This is when you create a legal entity for your business, which is separate from the people who own, run and work for it.
The business must be registered with Companies House, which means you’ll need a proper name for it and a business address. The company will have one or more directors, who are legally responsible for running it.
Company tax accounts will need to be completed each year and submitted to HMRC. The business will pay corporation tax, which is currently set at 19% and will then increase from April 1, 2023.
You can pay yourself money as a salary (which is taxed at usual income tax rates) but you can also take dividends from company profits. The dividends are taxed at a more advantageous rate. As a director, you’ll need to complete self-assessment each year to work out your tax bill.
If you’re going to have employees, you’ll need to set up PAYE to pay their salaries and will also need to set up a company pension scheme. We've rounded up what you need to do to take on staff here.
If you start out as a sole trader, it is possible to move to a limited company later. This can be a sensible approach if you won’t have any employees for a while and you want to see how your business does before you commit to extra paperwork and admin.
Read our full guide on sole traders vs limited companies to find out more about which approach is right for your circumstances and your business.
If your business turns over £85,000 or more a year, you must legally register for VAT. Some businesses might benefit from registering below this threshold – as it means you can claim back VAT on goods and services you buy for the business. An accountant can help you decide whether you should register even if you don’t legally need to.
If you’re going down the sole trader route, registering your business is quite straightforward. You simply need to register for self-assessment before October 5 in your second trading year.
If you miss the deadline, you may have to pay a fine, so make sure you take note of when the rules will apply for you. You’ll then need to start filing your tax return each year, you can do this yourself, or pay an accountant to do it for you.
If you’re planning to start a partnership, you must choose someone to be the ‘nominated partner’. This person can then register the business by completing an online form.
They will also be responsible for ensuring that a self-assessment form is completed for the partnership each year. All the partners will need to register for self-assessment with HMRC individually to sort out their personal tax bills.
If you’re starting a limited company, you must register with Companies House and you’ll need to pay corporation tax. Your business will need an official name, which must be unique. You’ll also need to provide a business address.
Be wary of using your home address, as it could have implications with your mortgage lender. If you don’t have offices or official premises, many accountants and agents let you use their address to register.
If you’re registering for self-assessment for the first time, you’ll need some basic information to hand. This includes your:
National insurance number
Full name (including any previous names, for instance if you’ve married and changed your surname)
Current address and when you moved it (you might need previous addresses if you’ve moved recently)
Date of birth
If you’re registering a limited company, you will also need your:
Unique business name (check the Companies House database to make sure someone hasn’t registered a firm with the same name)
Business address (bear in mind this will be published, so you may not wish to use your home address)
Details of all the company directors
Details of any company shareholders (including three pieces of personal information such as town of birth, mother’s maiden name, father’s first name, national insurance number or passport number).
Once you’ve registered for self-assessment, you’ll get a letter with your Unique Taxpayer Reference (UTR) number. Keep this safe.
You’ll get a second letter with an activation code, which will include a deadline for completing the process online. You’ll then be able to complete self-assessments.
If you’ve registered a partnership, then the nominated partner should also get a UTR for the partnership, so that this self-assessment form can be completed.
When you register a limited company, you should get a letter for HMRC that explains your legal responsibilities. This will also include a UTR for completing the company accounts.
If you’ve registered a business for VAT, you’ll set up an online VAT account, and should be sent an official company VAT number.
You may also need to consider other legal requirements. For instance, certain kinds of businesses may need a special licence, for instance if you plan on selling food.
You might also need insurance for your business, to protect you if things go wrong.
Finally, you might want to consider setting up a company pension – and if you plan on employing staff then this is a legal requirement.
Do your research carefully and use the government website to make sure your business is compliant.
Consider working with an accountant, who can help you navigate the setting up process and advise you on tax-efficiency, including which business expenses you might be able to claim.