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Becoming a Sole Trader

How to Set Up as a Sole Trader

Editorial Team

If you run a small business by yourself or are a new business owner, setting up as a sole trader is usually the simplest business structure to choose. The sole trader registration process is also very straightforward for most UK businesses, although registering isn't always required.

Read on to learn all about how to set up as a sole trader as we outline if you need to register and what you'll need if you do.

Before you begin

There is no difference between being a sole trader and self employment. 'Self employed' means that you are not working for an employer, whereas 'sole trader' describes your business' legal structure. When you register as a self employed sole trader, you are making it official from a legal perspective that you are your business. It is also a legal requirement to register as a sole trader if you:

  • Earn more than £1,000 per tax year
  • Proving you’re self-employed to, e.g. claim tax-free childcare
  • Making voluntary Class 2 national insurance payments to help you qualify for benefits

Step 1: Choosing a name for your business

The first thing to do is to find a suitable business name, although you can also trade under your own name if you prefer. Unlike a limited company, you do not need to register your chosen name with a sole trader business. Your chosen name should match your business idea and must not:

  • Include the words 'limited', 'ltd', 'limited liability partnership', 'LLP', 'public limited company', or 'plc'
  • Be considered offensive or derogatory
  • Be the same as an existing trademark
  • Contain any sensitive words / expressions
  • Suggest a connection with the government or local authorities

You will need to include your name, as well as a business name (if you have one) on your business stationery including all official paperwork such as invoices and letters.

Step 2: Registering with HM Revenue and Customs

You do not need to register with the Companies House, but you will need to register with HM Revenue and Customs (HMRC) online. You should register with HMRC as soon as possible, because failing to do so by October 5th in your 2nd business year of trading may result in a penalty (such as a fine). Here are a few things you will need to do as a sole trader:

  • Keep records of any business sales and related expenses
  • Send a self assessment tax return to HMRC every year. Choose a date every year that you are going to prepare your business accounts to.
  • Pay income tax on your business profits and class 2 and class 4 national insurance. The HMRC offers a calculator which you can use to help you budget and prepare for this.
  • Apply for a national insurance number if you are coming from abroad to set up your business
  • If you have employees you will also need to pay income tax, and make National Insurance Contributions (NICs)
  • Register for VAT if your turnover exceeds the VAT threshold of £85,000

Be careful to ensure that your business is making enough profit to cover your tax liabilities and factor that in to your business plan. If you're unsure it's always best to contact HMRC or visit their website for more information on tax matters.

Step 3: Special licences and permissions

Research carefully to determine whether you need any special licences to operate legally. For example, childminders, restaurants, and street traders all need permission from the local authority. This is important as your qualifications and business premises may be inspected to ensure you are following the appropriate regulations.

Step 4: Keeping records

It's important to keep accurate business records by storing and organising all of your receipts / transactions. Although you typically do not need to send in your records when you submit your tax return, having your records on hand is essential when, e.g., working out profit or loss, or presenting them to HMRC upon request. The most common business records that you will need to keep include:

  • Sales and business income
  • Expenses where applicable
  • Pay As You Earn (PAYE) records if you employ people
  • Any personal income

HMRC sees your personal and business income as one and the same, because operating as a sole trader means that your business is not a separate legal entity to you. This means that you are liable for any business debts. Using a separate account for your business can help you keep everything organised, making record keeping much easier and less time consuming.