Starting a business as a sole trader

If you’re thinking about setting up your own business, operating as a sole trader is often the simplest route to get started. It requires minimal paperwork, low costs, and puts you in complete control of your venture. However, there are important tax and legal considerations you’ll need to understand from day one. This guide covers what you need to know about becoming a sole trader in the UK, with practical steps to set yourself up properly.

What is a sole trader?

A sole trader is someone who runs their own business as an individual, without creating a separate legal entity like a limited company. You are the business, and the business is you. This means you keep all profits after tax, but you’re also personally liable for any debts or legal claims against the business. Unlike a limited company, you don’t need to register with Companies House, though you do need to notify HMRC and keep proper records.

Telling HMRC and registering for tax

Your first step is to notify HMRC that you’re self-employed. You must do this within three months of starting your business, or by 5 October following the tax year in which you started—whichever is later. You can register online through your personal tax account on the HMRC website, or by calling the Self Employment Services helpline.

Once registered, HMRC will issue you a Unique Taxpayer Reference (UTR), which you’ll need for all tax matters. You’ll also need to complete a Self Assessment tax return every year if your income exceeds the thresholds outlined below. Most sole traders do, so it’s worth assuming you’ll need to file annually.

Understanding your tax obligations

As a sole trader, you’ll pay income tax and Class 2 and Class 4 National Insurance contributions. Here’s what matters for the 2024/25 tax year:

Income Tax: You’re only liable on profits above the Personal Allowance, currently £12,570. If your trading profit is £12,570 or less, you won’t owe income tax, but you may still need to file a Self Assessment return if HMRC asks you to.

National Insurance: Class 2 contributions are a flat-rate payment (currently £163.80 per year for 2024/25) that helps you build state pension entitlements. Class 4 contributions are calculated as a percentage of your profits between £11,908 and £50,270 (8% for 2024/25), then 2% on profits above that threshold.

VAT threshold: If your annual turnover exceeds £85,000, you must register for VAT with HMRC. If you’re below this threshold, registration is voluntary but can be beneficial if you’re paying VAT on business expenses.

Record keeping and accounting

HMRC expects you to keep detailed business records for at least five years. This includes invoices, receipts, bank statements, and a record of all income and expenses. You don’t need to employ a qualified accountant, but you do need organised records to complete your tax return accurately.

Many sole traders find it helpful to use accounting software—platforms like Xero, QuickBooks, or FreshBooks make it straightforward to track income and expenses in real time. You’ll need to calculate your trading profit (income minus allowable expenses) to work out how much tax you owe.

Keep records of business expenses such as equipment, materials, office costs, professional fees, and vehicle running costs. The key rule is that expenses must be incurred wholly and exclusively for your business.

Getting a business bank account

Whilst not a legal requirement, opening a separate business bank account is strongly recommended. It keeps your personal and business finances separate, makes tax calculations clearer, and demonstrates good practice to HMRC if you’re ever audited.

Insurance and legal considerations

Consider public liability insurance if your work could affect third parties, and professional indemnity insurance if you provide advice or services. These aren’t compulsory for all sole traders, but they protect you against costly claims.

You’ll also need to check whether your business requires any licences or registrations, depending on your industry—for example, if you’re working with children or vulnerable adults, you may need a DBS check.

Conclusion

Starting as a sole trader is achievable and affordable, but getting your tax affairs in order from the beginning saves considerable time and stress later. Understanding your registration requirements, tax obligations, and record-keeping duties means you can focus on growing your business with confidence.

The rules around self-employment can feel complicated, and your circumstances might have specific twists that require careful consideration. For tailored advice, contact Severn Accounting — we’re here to help.