How to Set up a Sole Trader Company?

PHS Team

25 Feb, 2025

Being a sole trader is an easy way to become your boss in the UK, making it a popular choice for freelancers, contractors, and small business owners. 

As a sole trader, you are the business, giving you complete control and direct responsibility. This blog helps you with the step-by-step process, from registering with HMRC to confidently managing your finances, and making sure you file your sole trader income tax return on time. 

If you earn more than £1,000 in a tax year, you must complete HMRC sole trader registration

Whether you envision selling creates online, offering expert consultancy, or providing local services, knowing how to set up as a sole trader is important.

What is Sole Trader

A sole trader is someone who owns and runs a business as an individual. It's the simplest business structure in the UK, where you and your business are seen as one. 

Compared to a limited company, a sole trader enjoys a smooth sole trader registration process, but it's essential to grasp the sole trader's income tax return responsibility to avoid penalties.

However, understanding your responsibilities is important, including registering with HMRC, managing your finances, and complying with regulations. Remember to register with HMRC if your earning goes over £1000 in the financial year.

Pros and Cons of Being a Sole Trader

Choosing the right business structure is important. Being a sole trader has its advantages and disadvantages. Here's a detailed breakdown: 

When Do You Need to Register as a Sole Trader?

HMRC has a "trading allowance." If your gross income from self-employment is more than £1,000 in a tax year (which runs from 6 April to 5 April the following year), you must register as self-employed and declare your earnings to HMRC. This involves HMRC sole trader registration by registering for Self Assessment.

This applies even if you have expenses that bring your profit below £1,000. The threshold refers to your turnover, not your profit. Sole trader tax responsibilities strength once your income exceeds the trading allowance, and you are required to complete a tax return.

If you earn less than £1,000, you don't have to register as self-employed, and you don't need to tell HMRC, but you can return to claim it as allowance. However, understanding sole trader tax rules can help you stay compliant and avoid any future issues with HMRC.

How to Set Up as a Sole Trader

Setting up as a sole trader is an easy process. It involves several key steps to ensure you're operating legally and efficiently. 

• Choose a Business Name
• Register as a Sole Trader with HMRC
• Register for VAT with HMRC (if applicable)
• Register as an Employer with HMRC (if applicable)
• Obtain Any Necessary Licenses and Permits
• Meet Any Required Professional Qualifications or Registrations

Choose a Business Name

You don't have to register a separate business name,  you can simply trade under your own legal name (e.g., "Jane Doe"). However, if you want a trading name that customers recognise (e.g., "Jane's Cakes"), you can use one. 

Just remember to include your name and business name on official paperwork, like invoices, using "Jane Doe trading as Jane's Cakes." Your business name can't include restricted words like "Limited" or infringe on existing trademarks.

Register as Sole Trader with HMRC

Registering as sole trader involves registering for both income tax Self Assessment and National Insurance.

Register for Self Assessment as a sole trader

The easiest way to register is through the HMRC Government Gateway. You'll need a Government Gateway user ID and password. If you don't have one, you can create one during the registration process.

Alternatively, you can complete the HMRC form 'Register if you're a self-employed sole trader' and mail it in. You'll need your National Insurance number, business start date, and the nature of your business. Once registered, HMRC will send you a Unique Taxpayer Reference (UTR) and an activation code for your online account.

National Insurance Contributions

If your profits are above a certain threshold, you'll typically pay Class 2 and Class 4 National Insurance. These are calculated and paid as part of your Self Assessment tax return.

Register for VAT

If your taxable turnover exceeds £85,000 in 12 months, you must register for VAT with HMRC. If your turnover is below this, you can voluntarily register, which can be beneficial if you supply mainly VAT-registered businesses. You'll need a Government Gateway user ID and password to register.

Register as an Employer

If you have employees, you need to register as an employer with HMRC. This involves:

• Operating a PAYE (Pay As You Earn) scheme to collect income tax and National Insurance from employees.
• Enrolling eligible employees in a pension scheme and contributing to it.
• Obtaining Employer's Liability (EL) insurance.

Licenses and Permits

Depending on the nature and location of your business, you may need licenses or permits from local authorities. This could include licenses for selling alcohol, food premises, public entertainment, or certain types of beauty treatments. Check with your local council for specific requirements.

Professional Qualifications or Registrations

Depending on your profession, you may need certain qualifications or registrations. For example, physiotherapists need to be registered with the Health and Care Professions Council. 

Managing Your Finances as a Sole Trader

As a sole trader, effectively managing your finances is crucial for success and staying compliant with HMRC. Let's explore some essential aspects:

Open a Business Bank Account: Create a separate bank account specifically for your business transactions

Keep Detailed Records: Maintain accurate records of all financial transactions, including sales, expenses, and receipts

Create a Budget: Develop a budget that outlines your expected income and expenses. This will help you plan for costs and avoid overspending, ensuring you stay on track financially

Understand Your Tax Responsibilities: Familiarise yourself with your tax responsibilities as a sole trader, including income tax and National Insurance contributions.

Monitor Cash Flow: Keep an eye on your cash flow to ensure you have enough funds to cover operational costs and reinvest in your business.

What Taxes Do You Pay as a Sole Trader?

Understanding your tax responsibilities as a sole trader is essential. Here’s what you need to know:

• If your business turnover exceeds, you must register for Value Added Tax (VAT). Once registered, you must charge VAT on sales and can reclaim VAT on eligible expenses.
• You must pay Class 2 and Class 4 National Insurance contributions (NICs) based on your profits. These payments contribute towards your eligibility for certain state benefits.
• You must register with HMRC for Self Assessment to report your income and calculate your tax liability.
• Each year, you must submit a Self Assessment tax return detailing income and expenses to determine how much tax you owe. The deadline is 31st January after the tax year ends.

Understanding your responsibilities, such as Self Assessment, National Insurance, and potential VAT registration, ensures compliance and smooth business operations. With proper planning and record-keeping, you can confidently navigate self-employment and focus on growing your business.

As a sole trader looking to establish your business, register as sole trader PHS Associates can help you navigate the complexities of accounting, taxation, payroll, and business management. 

With their expertise, you can focus on expanding your business while they handle the accounting aspects. Setting up as a sole trader is the simplest way to start a business.

Contact us by phone at 0208 8611685 or by email at info@phs-uk.co.ukn if you need accountants.