How to set up as a sole trader

If you’re starting a small business, setting up as a sole trader will most likely be the simplest option. To be a sole trader, you must be the single owner of the business, with no partners or directors. But this doesn’t mean you have to be completely on your own as you can still hire employees. 

Being a sole trader means you’re in full control of the business. But while this has its benefits, sole traders also have unlimited liability. This means you will be personally responsible for any debts your business takes on and your personal assets could be at risk if your business fails.

Unlike limited companies, sole traders don’t need to register with Companies House. But there are a number of other steps you will need to carry out, as we explain in this blog.

Setting up as a sole trader

You’ll need to register as a sole trader with HMRC if any of the following apply:

• You earned more than £1,000 from self-employment in the past tax year (between 6 April and 5 April every year)
• You need to prove you’re self-employed, for example to claim tax-free childcare
• You want to make voluntary Class 2 National Insurance payments to help you qualify for benefits. 

To get started, take a look at the steps below:

Choose a business name

First up, you’ll need to settle on a business name, but there’s no need to register it. You can choose to trade under your own name or you can choose a different name – perhaps one that explains your business type, such as Claire’s Cakes, for example. You must include your name and business name (if you have one) on all official paperwork, such as invoices and letters.  

Note that sole traders must not include ‘limited’, ‘Ltd’, ‘limited liability partnership’, ‘LLP’, ‘public limited company’ or ‘plc’ in their name, and it must not be offensive.

Also be aware that if your name includes a ‘sensitive’ word, or suggests a connection with government or local authorities, you’ll need to get permission. As an example, if you wanted to use ‘Accredited’ in your business name, you’d need permission from the Department for Business and Trade. You can find out more on the gov.uk website.

Additionally, it’s worth carrying out a search on the UK Intellectual Property Office (IPO) website to make sure you’re not using a trademarked name or logo. And once you’ve chosen a name, you might want to register a trade mark to prevent other businesses using your name or logo. 

Register for self-assessment

The next step is to register for self-assessment. To avoid any penalties, you must do this by 5 October in your business’ second tax year, but you can register as soon as you start trading.

You can register for self-assessment on the gov.uk website. You will need to create a Government Gateway account and you’ll then be given a user ID and be able to set your password. Once you’ve done that, you can complete the sole trader registration form, entering personal information, including your National Insurance number, and details about the work you plan to do. Alternatively, you can print out the form and post it to HMRC.  

Once registered, you’ll get your Unique Taxpayer Reference (UTR) in the post within 15 working days, or you can get it sooner in the HMRC app. You’ll need this code to be able to file your self-assessment tax return. You’ll also be sent an activation code to enable you to complete the set up of your Government Gateway online account. 

Note that if you employ staff, you will also need to register as an employer with HMRC. 

Find out what records to keep

As a sole trader, you must keep records of your business income and expenses for your tax return. You’ll need to keep records of:

• All sales and income
• All business expenses
• VAT records if you’re registered for VAT
• PAYE records if you employ staff
• Personal income 
• Any grants

You won’t need to send in these records when you file a tax return, but it’s important that they are accurate as this will help you to work out your profit or loss for your tax return. It’ll also enable you to easily show them to HMRC if asked. You must keep records for at least five years after the 31 January submission deadline of the relevant tax year. 

Get to grips with expenses

As a self-employed individual, you can deduct some of your business running costs to work out your taxable profit, as long as they are allowable expenses. As an example, if your turnover was £30,000 and you claimed £5,000 in allowable expenses, you would only pay tax on the remaining £25,000.

Costs you can claim as allowable expenses include:

• Office costs, such as stationery or phone bills
• Travel costs, such as fuel, parking, train or bus fares
• Clothing expenses, such as uniforms
• Staff costs, such as salaries or subcontractor costs
• Financial costs, such as insurance
• Costs of your business premises, including lighting and heating
• Advertising or marketing costs
• Training courses related to your business.

If you’re not sure whether a business cost is an allowable expense, you can contact the self-assessment helpline. Or, if you hire an accountant, they will be able to help you. 

If you use something for both personal and business reasons, you can only claim allowable expenses for the business costs. So if you work from home, you might be able to claim a proportion of your costs for heating, electricity, council tax, mortgage interest or internet and phone use. But you will need to find a reasonable method to help you calculate this. 

As an example, if your home has four rooms and you use one of them as an office, you could divide your total electricity use by four and claim that amount as your allowable expense. So if your electricity bill cost £800 a year, you could claim £200 as an allowable expense. Or, if you only work from home one day a week, you could divide your electricity bill cost by seven. In this example, that would work out to be £114.29. 

Manage your accounts

Sole traders don’t need to submit as many accounts to HMRC as limited companies. But you will need to keep detailed records and keep hold of all receipts and invoices. 

At the moment, sole traders only need to file their self-assessment tax return once a year. If you’re filing by paper, your deadline is 31 October (for the previous tax year). If you’re filing online, the deadline is 31 January. This is also the date by which you must pay any tax due.

But the way self-assessment returns are filed is changing from April 2026, when Making Tax Digital comes into effect – it already applies to businesses filing VAT returns. The new rules mean that self-employed individuals with an income of more than £50,000 a year must keep digital records of accounts and send summaries every quarter, rather than file a tax return once a year. From April 2027, the rule change will extend to those with an income of between £20,000 and £50,000. 

Verify if you need to pay VAT

Your business must be VAT registered if your VAT taxable turnover has exceeded £85,000 over the past 12 months. If your annual taxable turnover is less than £85,000 you can also voluntarily register for VAT. You can register on the gov.uk website and from the date you register, you will need to charge VAT on all taxable sales.  

If you do register for VAT, you will need to complete a VAT return one month and seven days after the end of an accounting period. This occurs every three months, so you’ll need to submit a VAT return each quarter. You must still complete a VAT return even if you have no VAT to pay or reclaim. 

Consider opening a business bank account

There’s no legal requirement for sole traders to open a business bank account as your business isn’t legally separate from you. But opening a business bank account can still have its benefits. 

For a start, it will help you to keep your business and personal finances separate, which can make life a lot easier when you come to file your tax return. What’s more, if you hire an accountant or HMRC ever has to investigate your business finances, they won’t need to look at your personal finances as well. 

Having a separate business bank account can also help you build a business credit score, particularly if you have an overdraft. And it can make you appear more professional – some clients might prefer transferring funds to a bank account in your business name, rather than one in your own name. 

In addition, some business bank accounts come with accounting software integration, such as Xero, QuickBooks and FreshBooks, which can help you keep on top of your finances. Some also include invoicing tools that can streamline your invoicing process and chase late payments on your behalf. It’s certainly worth comparing business bank accounts to see if there’s one that could work for you. Just watch out for monthly fees and transaction charges. 

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