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The essential guide to becoming a sole trader

Becoming your own boss is a dream scenario for many, but setting up in business requires a lot of thought, research and preparation.

This guide will look at some of the steps required to help you on the way to running your own business and working for yourself.


What is a Sole Trader?

Setting up as a sole trader is the fastest and easiest way to become your own boss.

With little in the way of paperwork and full control over how you work, you can get your new business up and running straight away.

Sole traders, as the heads of their company, are liable for the successes and failings of their business.

While that may sound daunting being a sole trader has a wealth of benefits.

For instance, you’ll be able to take home 100% of the profit your business makes after tax opens in new window.

While being a sole trader may come with a lot of responsibility there are a number of income protection and business insurance policies opens in new window available to ease the financial risk of a legal claim, negligence claim or illness to either yourself or a key member of staff.

Once you’ve decided to become self-employed you’ll need to choose a legal structure opens in new window for your new business.

This will affect how you run the business and how you pay tax opens in new window .

Before you set up your business it’s always a good idea to seek out independent specialist advice on what the most appropriate legal structure is for your business.

Most people take the sole trader route as it’s the quickest and easiest way to go into business by yourself.

You’ll need to register as a self employed sole trader opens in new window with HM Revenue & Customs (HMRC).

Being a sole trader means flexibility – you can choose to work full or part time or even on a casual basis while still working as an employee.

It’s a great way to test out a business idea opens in new window or grow your start up until it generates enough income to support you.


Sole trader vs. limited company. What are the main differences?

Registering as a sole trader is easier than setting up a limited company opens in new window.

There’s no paperwork, your business affairs remain private and you can keep all the profits you make after tax opens in new window.

However, as a sole trader you’re liable for any debts that your business incurs, which means your savings, home, and other possessions are at risk from creditors.

If the nature of self-employment means you’re likely to build up substantial debts then consider setting up a limited company opens in new window instead.

What is a limited company? In short, a limited company operates as a separate entity to your own finances.

This reduces the financial risk to you if your business were to be unsuccessful. Often private limited companies have a board of directors or shareholders.

However, these shares cannot be sold on the public stock market.

The process of setting up a limited company is different from setting up as a sole trader.

You’ll need to register your company name, address and various other details with Companies House and notify HMRC when your business begins trading.

Read our guide on private limited companies opens in new window.


How do I pay tax when setting up as a sole trader?

As a sole trader you’ll need to pay income tax based on your business profits, along with National Insurance contributions (NICs).

This is done through a process called self-assessment form opens in new window, which involves submitting a form each year to HM Revenue & Customs (HMRC) to calculate what you owe in tax and then paying the required amount.

Once you’re registered as self-employed you’ll get a letter, usually in April, telling you when you need to complete your first self-assessment form opens in new window.

You can check your National Insurance contributions by asking for a National Insurance statement online opens in new window.


Can I employ people as a sole trader?

Being a sole trader doesn’t mean you have to work alone.

As soon as you employ staff opens in new window you will have to notify HMRC and collect income tax and National Insurance contributions from your employees’ monthly salaries as well as run a Pay As You Earn (PAYE) payroll scheme opens in new window.

Read our guide to new employer responsibilities opens in new window.


Naming your sole trader business

You can trade under your own name or select a specific business name opens in new window.

Be aware that if you opt for a business name you must make sure that your business stationery shows your own name as well as the trading name of the business.

Don’t pick a name that’s the same or too similar to that of an existing company – you could end up with a legal dispute opens in new window.

Research online for businesses with similar names in your local area and check the register at  Companies House opens in new window to see if a limited company with that name already exists.

Other rules apply when naming your business.

Be careful not to include offensive words nor sensitive words such as Royal or British, which may mislead your customers.

Read our guide on how to choose a name for your new business opens in new window.


How do I register as a sole trader?

Setting up as a sole trader is straightforward.

You need to register with HMRC opens in new window within three months of becoming self-employed – even if it’s on a part-time basis. Failing to do this will mean paying a £100 penalty.

You can register by calling the HMRC Newly Self-Employed Helpline on 0300 200 3500 or by register at HMRC online.

Alternatively, you can download and complete HMRC’s CWF1 form and post it to the address given on the form.

You’ll need to provide the HMRC with your name, date of birth, address, telephone number, National Insurance number, the name and type of your business and the start date.


Sign up for self-assessment

You or your accountant must complete a self-assessment form opens in new window each year for HMRC detailing your income and business expenses opens in new window for the last tax year.

As a sole trader running a small business you can use a cash accounting method opens in new window</a, which means you’ll only have to pay tax opens in new window on the money that actually comes into and out of your business during the tax year.

You can deduct business expenses such as the cost of vehicles, computers, stationery, as well as day-to-day running costs like electricity opens in new window to reduce the amount of income tax payable opens in new window.

Any money owed for the tax year ending in April must be paid by January 31 the following year.

HMRC may ask you to make a payment on account for the current tax year, in which case you’ll need to do this by July 31st.

You can complete a paper self-assessment form to be submitted by 31 October or an online version by 31st January the following year.

With its later deadline, filling in the online form is best and you’ll see instantly how much you’ll have to pay.

An online account for your self-assessment is set up automatically when you register as self-employed.

You’ll be sent a Unique Tax Reference (UTR) number which you’ll need when completing your self-assessment and for all correspondence with the HMRC.

As a sole trader you must pay Class 2 National Insurance contributions (NICs) opens in new window.

This is collected at the same time as your tax payment via self-assessment.

You may need to pay Class 4 NICs if your annual profits exceed £8,060 but this will be calculated automatically when you fill in your annual self-assessment form.


Do I need to register for VAT as a sole trader?

You don’t have to worry about VAT opens in new window until your annual business turnover exceeds the VAT threshold, currently £90,000 (as at March 2023) – although you can choose to register for VAT at any time.

Once registered for VAT, you must charge VAT to all your customers.

You can then claim back the VAT you’ve paid on business purchases.


What business records should I keep as a sole trader?

It’s important you stay on top of your business paper work to be a successful sole trader.

Store a paper record of every business transaction including invoices issued to customers, receipts for payments made, payments into and out of your bank account, receipts for business expenses and PAYE records if you employ people.

If you use traditional accounting methods opens in new window you’ll also need to have records of money you’re owed but haven’t received yet and money that you’re committed to spend but haven’t yet paid.

It’s easier to gather and store paperwork as you go rather than try to piece everything together later when you or your accountant are filling in your annual self-assessment.

If paperwork is missing be sure to inform HMRC that you’re using estimated rather than actual figures.

Keep your paperwork for at least five years after the 31st January submission deadline of the relevant tax year as HMRC may also ask to see them to check you’re paying the right amount of tax.

As a sole trader you don’t need a separate business bank account opens in new window, although it can make your business admin and bookkeeping easier if you do.

“Should I get an accountant when I start my own business?” is a question we’re regularly asked here at Start Up Loans.

There is no right or wrong answer; it’s simply a matter of preference.


Sole trader insurance policies

As soon as you take on staff you’re required by law to take out employers’ liability insurance to protect your employees if they fall ill or are injured in the course of their work.

If you fail to do so you could be fined up to £2,500 per day.

Other forms of business insurance opens in new window aren’t legal requirements but offer protection should your business or products harm others.

For example, it’s a good idea to have public liability insurance opens in new window if members of the public come to your premises or could be injured as a result of your business.

Some professions may require policies such as professional indemnity insurance that’s designed to protect your business against the cost of settling or defending a customer’s claim that your work was inadequate or caused them to lose money.


Planning to become a sole trader? How a Start Up Loan can help

Start Up Loans is a government-backed scheme helping budding business owners all over the UK.

We provide personal loans for business purposes to help your start up business get off the ground.

Depending on your eligibility, you could access a loan of up to £25,000 with a 6% fixed rate interest rate per annum.


Learn with Start Up Loans and help get your business off the ground

Thinking of starting a business? Check out our free online courses in partnership with the Open University on being an entrepreneur.

Our free  Learn with Start Up Loans courses opens in new window include:

Plus free courses on finance and accounting, project management, and leadership.


Reference to any organisation, business and event on this page does not constitute an endorsement or recommendation from the British Business Bank or the UK Government. Whilst we make reasonable efforts to keep the information on this page up to date, we do not guarantee or warrant (implied or otherwise) that it is current, accurate or complete. The information is intended for general information purposes only and does not take into account your personal situation, nor does it constitute legal, financial, tax or other professional advice. You should always consider whether the information is applicable to your particular circumstances and, where appropriate, seek professional or specialist advice or support.

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