For the individuals who have scraped up an investment sufficient for pouring into a venture, setting up a sole trader business in the UK is one of the simplest and favourable options. A sole trader is a self-employed individual who independently and single-handedly governs every single aspect of their business, including financial and legal matters.
However, in contrast to the limited companies, sole traders lack the benefit of having a separate legal identity from their business, meaning all profits, losses, and liabilities rest on the owner alone. Regardless, owing to the immense freedom and control, sole proprietorship remains an enticing option for the entrepreneurs.
Accordingly, we are going to look at a step-by-step approach on how to set up a sole trader business, highlighting key requirements and responsibilities in compliance with the HMRC regulations for the current tax year.
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Understanding the steps on how to set up a sole trader business:
The following is a stepwise guide to how to set up a sole trader business in the UK in congruence with the HMRC regulations:
Determine if taking the solo route is right for you:
First and foremost, before you learn how to set up a sole trader business, it is paramount that you determine if treading down the path solo would indeed go to your advantage.
To clarify, it is crucial to understand whether this business structure is suitable for your circumstances and whether you are willing to jeopardise or put your personal assets on the line for the sake of your business.
To this end, you must weigh the pros and cons of sole tradership to reach a rational decision. A few of the key advantages of being a sole trader include:
- Easy and straightforward setup.
- Minimal administrative requirements.
- Reduced paperwork.
- Limitless control over business decisions and profits.
- Streamlined tax reporting through self-assessment.
However, since no undertaking is devoid of its risks and challenges, sole tradership also accompanies certain downsides.
To learn in detail the benefits and drawbacks of going solo, read our guide: What are the advantages and disadvantages of being a sole trader?
Choose a name for your business:
The next step in learning how to set up a sole trader business involves naming your business. Fortunately, HMRC allows you to choose whether you want to run your business under your own name or another name. If you decide to conduct trade under a different business name rather than your own, there are a few rules you must adhere to, such as:
- To register with a sole trader business name, you must choose a name that is unique and not already in use. For this, you can use a company name availability checker to confirm that your business name is not currently in use.
- You can register your trading name by accessing HMRC’s online services via the government website. Alternatively, you can do so by completing a paper form.
- Once your business name is registered with HMRC, you can start conducting trade and handling your finances as a sole trader under your selected business name. Please take note that your business name and your own name must be included in any official business communication. For instance, you must add your and your business name on official paperwork, such as invoices, emails, and letters.
On the flip side, as per HMRC’s guidelines, there are certain criteria under which your business names must not:
- Be too identical to another company’s trademarked name, as you will have to change it later if someone lodges a complaint against you for emulating their business name.
- Include ‘limited’, ‘Ltd’, ‘limited liability partnership’, ‘LLP’, ‘public limited company’ or ‘plc’
- Be offensive or contain misleading words.
Register with HMRC as a sole trader:
To carry out your trade legally as a sole trader in the UK, you must register yourself as a sole trader with HMRC. However, you can do that by registering for self-assessment to report your income and pay taxes.
You can do that with the following steps:
- You will first go to the HMRC Website via gov.uk and search for ‘Self Assessment tax returns’.
- Create a Government Gateway Account, log into it and inform the HMRC regarding your sole trader status under self-employment. Notably, your government gateway account allows you to access various online tax services. If you already do not have an account, create one.
- Next, you will complete the HMRC self-assessment form by providing your essential business details, such as entering your name, address, business nature, date of birth, and National Insurance (NI) number.
- After completing and submitting the form, you will receive your Unique Taxpayer Reference (UTR). HMRC will send your UTR within 10 days, which is necessary for submitting tax returns.
- After the successful completion of registration, it is now obligatory for you to file a self-assessment tax return every year through your online account.
To learn more about self-assessment registration, read our detailed guide: How to register for self-assessment as a sole trader?
Understand your tax obligations as a sole trader:
As a sole trader, your business profits are subject to income tax and NICs deductions through self-assessment. For the current tax year, which is from 6 April 2024 to 5 April 2025, the following income tax rates are applicable for the sole traders:
| Tax Band | Tax Rate (%) | Taxable Income |
| Personal Allowance | 0 | Up to £12,570 |
| Basic Rate | 20 | £12,571 to £50,270 |
| Higher Rate | 40 | £50,271 to £125,140 |
| Additional Rate | 45 | over £125,140 |
To keep pace with the income tax rates, keep visiting the government website often.
In addition, sole traders also have Class 2 NICs and Class 4 NICs to fulfil.
While Class 2 NICs are considered paid, Class 4 contributions are mandatory.
For tax year 2024 to 2025, Class 4 NICs rates are:
6% on profits of £12,570 up to £50,270
2% on profits over £50,270
Maintain accurate financial records:
Keeping accurate records of the crucial business details across the tax year is yet another significant aspect of understanding how to set up a sole trader business.
HMRC requires sole traders to maintain proper financial records for at least five years.
These records include:
- Invoices and receipts for all income and expenses
- Bank statements for keeping business transactions separate from personal expenses.
- When your turnover exceeds £90,000, you must register your business for VAT and become VAT-registered.
- Payroll records if you have hired employees for the smooth execution of tasks.
It is worth pointing out here that using accounting software or hiring a professional accountant can considerably help you streamline your record-keeping and maintain conformity to HMRC regulations.
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Registering for VAT (if applicable):
If, in your business journey, your business progresses financially by leaps and bounds, it signifies your profits or earnings will surge. Accordingly, if your taxable turnover or earnings exceed £90,000 in a 12-month period, registration for VAT becomes mandatory. Nonetheless, you can also opt for voluntary registration by taking into account its benefits.
Since sole traders constitute a significant type of self-employed workers, the VAT obligations of self-employed individuals are the same as for sole traders.
Therefore, read our following guides to gain an insight into VAT registration and calculation respectively:
How to register for VAT as a self-employed?
How to calculate VAT as a self-employed individual?
Conclusion:
In brief, you can seamlessly understand how to set up a sole trader business in the UK since it is a straightforward process. However, it still requires deliberation and judicious planning to ensure your sole trader ambitions translate into a functional business and maintain compliance with HMRC regulations.
From deciding whether sole tradership is the most suited business structure to registering with HMRC for self-assessment to managing taxes, keeping accurate records, and registering for VAT (if applicable), the above-elaborated steps are essential to follow.
Further down the line, to ensure your business remains financially compliant and the stress of handling taxes remains at arm’s length, we suggest you benefit from the services of an adept accountant.
To achieve this, find yourself one of the registered accountants at Accountingfirms, who can substantially help sole traders with their business registration, tax obligations, VAT compliance, and more. With their expertise, you can thrive in your business by giving it your unwavering focus while staying compliant with HMRC regulations.
Disclaimer: The information provided on AccountingFirms.co.uk is for informational purposes only and should not be considered as financial advice. Always consult with a professional accountant to ensure compliance with UK laws and regulations.