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Table of contents
Fancy launching a new business? Many people set up as a sole trader to begin with as it’s quick, easy and cheap to do. But what should you consider, and how do you actually register? Don’t worry, that’s not us asking you – let’s take a look.
Being a sole trader is one of the ways that you can become self-employed. As a sole trader you’re the sole owner of your own business, so although that might sound like you’re a lonesome Larry, it also means you’re in full control of everything, including any assets, cash and profits.
There aren’t any directors or shareholders like in a limited company, and you won’t need a friend like you would to set up a partnership.
It comes with lots of benefits and flexibility but can be risky too.
This is because sole traders have what is called “unlimited liability”. It means there’s no difference (legally speaking) between you and the business, so if the business is sued or runs out of money, then you’re personally liable to foot the bill.
Business owners that operate as a sole trader usually have no or very few employees and are often freelancers, tradespeople or gig economy workers. Examples include the likes of photographers, copywriters, taxi or delivery drivers, plumbers, interior decorators, makeup artists or hairdressers. But don’t let us put you in a corner – you can be whatever you want!
Yes! If you’re a sole trader then you’re self-employed, but being self-employed doesn’t necessarily mean you’re a sole trader (bear with us). So, being self-employed literally means just that – you’re employed by your own good (or bad) self. There are other business structures you might use to do this, and being a sole trader is just one of them.
Being your own boss, having complete control and setting your own tasks and hours are really appealing when it comes to being a sole trader. As there’s generally no-one else involved, you can adapt your business quickly and make decisions without anyone else’s approval.
Other advantages to being a sole trader include:
The big drawback with being a sole trader is that the buck stops with you. Realistically this is true in any business structure you choose, but as a sole trader there isn’t any legal separation between you and the business, which can make it harder to strike a decent work/life balance. Other disadvantages include:
Don’t forget too that things like taking a sick day when you’re self-employed are a bit more complicated, because you won’t necessarily get sick pay or holiday pay. If you become ill, injured or can’t work for some reason, you may end up in financial trouble which can be seriously stressful. You could even lose a contract if you can’t finish it and don’t have anyone to do so on your behalf.
It’s something to think about when you’re working out what to charge your clients!
It’s best practice to register as a sole trader the minute you start trading, but before you scamper off – you might not need to register as a sole trader for Self Assessment just yet.
Technically speaking, you don’t need to register as a sole trader unless the income you earn from self-employment is more than the tax-free trading allowance (which is currently £1,000).
For example, if you’re in full-time employment, but bake cakes on the side, you won’t need to tell HMRC, as long as your self-employed earnings are less than £1,000.
If you think you’ll earn more than the £1,000 trading allowance in a tax year, you’ll need to make sure you tell HMRC you’re registering for Self Assessment before 5th October in your second tax year.
A tax year starts 6th April and ends 5th April (yes, every year). So, if you started trading in February 2025, your first tax year is 2024/25. That makes your second tax year 2025/26, so make sure you sign up before 5th October 2025!
Registering as a sole trader is usually a pretty straightforward process. We’ll outline the steps you need to follow below:
Some people like to just use their own name for their business, or you can pick a business name that’s totally different. It shouldn’t be offensive though, or contain wording that makes it look like a limited company or partnership.
Make sure your business name is not the same or similar to a business name that already exists, especially if it’s trademarked. You could have a look on the Intellectual Property Office website to check.
You’ll need to register as a sole trader for Self Assessment with HM Revenue and Customs (HMRC). This is the system you will use to report your self-employed earnings so you can pay the right amount of tax and National Insurance contributions (NICs).
Sole traders can register online through the HMRC website, but you’ll need to create a Government Gateway ID if you don’t already have one. Keep this ID safe when you get it!
Log into your Government Gateway account and select ‘Self Assessment (SA)’ and then choose ‘Register for Self Assessment’. You’ll need to provide some basic information about yourself and your business, including:
HMRC will send you your Unique Taxpayer Reference (UTR) number and an activation code to access your account. Always keep your UTR number on hand, as you’ll be quoting this number to HMRC each time you talk to them or submit information.
Once you’re signed up, spend some time having a look around. This will be where you send all your tax returns, so it’s worth getting used to! You’ll need to submit a Self Assessment tax return every year unless you ask HMRC to cancel your registration, even if you make a loss or don’t have any income to report.
Remember, HMRC won’t know what’s happening unless you tell them, so they might just assume you’ve forgotten (and hit you with a penalty)!
You might need to register for a different reason, such as because you:
Registering if you’re not self-employed is a little different, so always check GOV. UK for advice.
Thanks to various tax allowances and thresholds the answer to this depends on how much you earn, and how you earn it – basically, you might need to. We’re a lot less vague about it in our article about sole trader taxes.
This one gets a special mention because if your tax bill is over £1,000, HMRC assume you’ll earn the same amount next year and ask you to make an advance payment on next year’s bill. It can be a nasty shock if you don’t expect it!
Known as Payments on Account, you’ll need to pay this year’s bill, and then half of it again as a payment towards the following year.
One of the essentials when running any business is that you keep accurate, up-to-date records of your business income and expenses so you can refer to them. Using a process known as bookkeeping, this includes logging invoices, receipts, bank statements and any other financial documents.
You’ll need this information to submit your tax returns and claim back any allowable expenses, so it really is up there on the to-do list!
Businesses must become VAT-registered once their turnover reaches the £90,000 registration threshold in a 12-month period, so you might not need to sign up straight away!
Sole traders don’t need to have a separate business bank account, but it’s well worth keeping your personal and business finances separate if you can. It will make it much easier to manage your accounts, for a start!
Some businesses must have insurance – it all depends on your circumstances. For example, an employer needs to have Employer’s Liability Insurance, but there are other types of insurance too, such as income protection cover.
Need help keeping your financial accounts in order as a sole trader? Create your free Pandle account today and see how we can help.
A creative content writer specialising across business, finance and software topics. I have a love for all things writing, and creating engaging, easy to understand content that helps everyday people!
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