Setting up a sole trader business is incredibly popular. There are more than 4.1 million sole traders in the UK. They account for more than 74% of all private businesses in the UK. Between them, the UK's sole traders generated turnover of more than £330 million in 2023.
If you are thinking of joining the ranks of sole traders here in the UK, it's likely you will have some questions. The Start Up Donut team is here to help.
What is a sole trader?
A sole trader is someone who works for themselves. A sole trader can choose what work they do, when and how they will do it. They are responsible for registering with HMRC, filing a self assessment tax return and paying their own tax. Legally, a sole trader and a sole trader business are one and the same.
Is sole trader the same as self-employed?
Yes. Sole trader is just another term for someone who is self employed. As a sole trader you are automatically considered self employed by HMRC – even if you have not yet registered as self employed.
A sole trader might also refer to themselves as a freelance, sole proprietor or contractor.
Types of sole trader businesses
Sole traders operate in just about every sector of the UK economy from service-based businesses such as bookkeepers, accountants, personal trainers and therapists to trade-based businesses such as plumbers, mechanics, builders and roofers. After all, there are more than 4.1 million sole traders in the UK.
If you have skills or knowledge that other businesses or people need, there could be a sole trader business in you just waiting to be launched.
What is the difference between a limited company and a sole trader?
It's quick and easy to start a sole trader business. Once you have registered with HMRC for self assessment, you simply need to keep on top of your accounts and make sure you submit your tax returns on time and pay any tax and National Insurance owing.
If you decide to set up as a sole trader, there is no legal distinction between you and the business. You are the business and are therefore responsible for any business debts or actions taken by or against the business.
In a limited company, the shareholders and any directors are separate from the business. In other words, your liability is limited to the money you have invested in it, either as share capital or through a loan.
However, you can still be held personally liable as a director if you allow the business to trade wrongfully or fraudulently. The administration and costs involved in running a limited company are also more onerous. You will need to consider the tax implications too as company profits and any income you (or other employees) take from the company, are taxed differently.
Choosing a business name for a sole trader business
You can choose to trade under your own name or a business name. It's worth thinking about the impression you want to create. Trading under your own name makes it clear that you're a sole trader. If you want to give the impression of a bigger or more established business it helps to have a business name.
There are few restrictions on business names. You cannot include terms that imply you are a limited or public company if you are not. Likewise, your name must not match or be similar to any competitors. Otherwise, you can trade under any name you choose.
Ideally, you want a business name that is memorable, easy to spell (so people can find you online) and gives people an indication of what your business does. Check that any name you are considering is not already being used. Also, check that the name you want to use is available as a domain. This is important if you plan on building a company website in the future.
It can be helpful to check the Companies House name checker, even if you are starting a sole trader business.
How to register as a sole trader
To register as a sole trader, you must register with HMRC for self assessment. Ideally, you should register as soon as possible after starting your business but you can register at any point before 5 October in your business' second year. For example, if you became a sole trader between April 2023 to April 2024, you should register before 5 October 2024.
You can:
- register as a sole trader online
- call HMRC on 0300 200 3310
- complete and return form CWF1 if you cannot complete an online application
You must register if you earn more than £1,000 in a tax year. Registering is free.
Before registering, make sure you have the following information:
- your National Insurance (NI) number
- name
- date of birth
- address
- phone number
- email address
- name of business
- details of the work you will do
- start date
It takes up to ten days to register for self assessment. You will be sent an activation code by HMRC that you will need when you log in to your Government Gateway account for the first time.
If you do not register on time, you can avoid a penalty by making sure you submit your self assessment tax return and paying any tax owing on time.
Will I need to re-register as a sole trader if I have submitted a self assessment tax return before?
Yes. Even if you have been registered as a sole trader in the past, or have submitted a self assessment tax return before, you will need to re-register with HMRC using form CWF1 if you did not complete a self assessment for the previous tax year.
You will need your ten-digit Unique Taxpayer Reference (UTR). You can find your UTR on previous tax returns, your online account or other documents from HMRC or by calling the self assessment helpline on 0300 200 3310.
How much tax does sole trader pay?
As a sole trader, you will be taxed on your business profits after your allowable expenses and any capital allowances have been deducted. You must submit a self assessment tax return detailing all your income and expenses and pay any tax and National Insurance contributions owing.
Your basic personal allowance (the amount you can earn before you start paying tax and NI) is £12,570. Your personal allowance will be reduced once you start earning over £100,000.
There are three income tax bands
|
Taxable income (£) |
Tax rate |
|
£0- 37,700 |
20% |
|
£37,701 - 125,140 |
40% |
|
Over £125,141 |
45% |
NICs are aloso based on your profits and are calculated and collected through self assessment alongside your income tax. You will pay Class 4 NICs at 6% on profits between £12,570 and £50,270 and an additional 2% on profits in excess of £50,270.
You will not pay NICs if you are under 16 or over the state pension age.
Do sole traders pay VAT?
Yes. As a sole trader, you will pay VAT on the goods, services or materials you buy for your business.
You do not need to register for VAT yourself unless your turnover exceeds the registration threshold (£90,000) for the previous 12-month period or will exceed the threshold in the next 30 days. However, it can make sense for some sole traders to register for VAT - even if their turnover is under the registration threshold.
- VAT registration allows you to reclaim input VAT (the VAT you pay on the goods and services from other VAT-registered businesses) if it is higher than the VAT amount you have charged your customers.
- VAT registration give your business credibility by making it appear more established.
However, VAT registration can affect your pricing. You will either need to add VAT to your prices or absorb the VAT element yourself, eating into your profits. There are also additional administrative considerations with VAT registration.
If you're required to register for VAT (or decide to register voluntarily), you must charge VAT on any goods and services you sell that are subject to VAT. You will also need to keep proper VAT records, issue VAT invoices, submit VAT returns and pay any VAT owing. The VAT you pay will be the difference between the VAT you've paid on goods and services and the VAT you've charged your customers.
What tax records do you need to keep as a sole trader?
You will need to keep a record of:
- any sales and income
- all business expenses
- VAT records (if you're registered for VAT)
- details of any personal income
- any support grants you receive
- bank statements
These days, most sole traders and small business do this using accounting software. It makes filing a self assessment tax return much quicker and simpler.
You will need to keep these records for five years after the end of a tax year they relate to in case HMRC decide to investigate your tax returns.
What expenses can you claim as a sole trader?
Broadly speaking, if an expense has been incurred in the course of doing business, it will be an allowable expense and you will be able to claim it. This means there is a wide range of possible expenses you could claim from mobile phone and broadband costs to marketing expenses, materials, tools, stock, premises and utility costs.
Do you need a separate bank account as a sole trader?
You're not legally required to have a separate bank account as a sole trader. However, it's recommended that you open one as it helps you to keep your personal and 'business' finances separate. This in turn makes it easier to keep on top of your accounts and tax as they are not 'muddied' by personal transactions. Some banks will also prohibit you from making business transactions from a personal bank account.
What are the insurance requirements for sole traders?
It's likely that you will need some insurance as a sole trader. Some insurances are required by law. For example, you will need at least third-party insurance if you use a vehicle for business purposes. You will need employers' liability insurance if you take on staff and professional indemnity insurance is compulsory if your business is in the legal, accountancy or financial service sectors. You might also need specific types of insurance before you can join some trade associations or gain certain accreditations.
Other insurance policies, whilst not legally required, can make good business sense as they can protect you and your business. You might want to consider business interruption insurance, key man or income protection insurance in case illness, accidents or a serious incident such as a fire or flood make it impossible for you to work. You might also want to insure any valuable tools or assets that you need for work.
Can I hire people as a sole trader?
Yes. Although the term 'sole trader' implies that you work by yourself, you can employ other people to work for you. To hire others to work for you, you must:
- register as an employer with HMRC
- check the employee's right to work in the UK
- set up your payroll and operate PAYE
- check if you need to enrol your employees into a workplace pension scheme
- arrange employers' liability insurance
- provide employees with a written statement of employment within 30 days
- check if you need to apply for a DBS check
As an employer, you will also have to make sure that your employees benefit from all their normal employment rights. These cover a wide range of areas from minimum pay and statutory pay and leave, working hours, holidays and breaks , redundancy and other wide-ranging rights and protections.
Finally…
So, you've read our guide to starting your sole trader business and you're good to go. The only thing that remains is to sign up for our regular weekly newsletters. They are packed with small business news, views and offers that will help you on your way.