How to register as a sole trader

What is a sole trader?
Why become a sole trader?
Benefits of being a sole trader
When to register as a sole trader
How to register as a sole trader
How do I register a sole trader name?
How long does it take to register as a sole trader?
Does it cost to register as a sole trader?
Can I be a sole trader and employed?
What tax does a sole trader pay?
How do I pay tax as sole trader?
Do sole traders pay VAT?

What is a sole trader?

A sole trader is a type of business structure where a self-employed person runs their own business. As a sole trader, you’re both the owner and operator of your business, as one entity.

This means you have complete control over your operations and are responsible for all aspects of it, including managing the finances and making decisions, as well as any liabilities.

Setting up as a sole trader can be a straightforward process, but you’ll need to meet all the necessary legal and financial requirements.

*T&Cs and fees apply. Subject to application, eligibility and credit check.

Why become a sole trader?

Becoming a sole trader can be an ideal option if you’re looking to set up a small enterprise. If you’ve always wanted to run your own business, the simple structure may offer the chance to pursue your passion, while having complete control over your finances and operations.

As you’re self-employed, you are responsible for paying your own taxes and keeping records of your income and expenses. You’re also responsible for your business debts, as you and your company are the same legal entity.

Benefits of being a sole trader

The six main advantages of a sole trader structure include:

• You are your own boss and can make the decisions.
• You keep any post-tax profits your business makes, as there are no partners or shareholders.
• Setting up as a sole trader is a relatively quick and straightforward process, with minimal costs and paperwork.
• Accounting requirements are less complex than those for limited companies.
• You don’t have to register with Companies House.
• It’s relatively easy to change your business structure to a limited company or partnership in the future if you need or choose to.

When to register as a sole trader

If you’ve run your own business for some time and made money across that period, you’re considered a sole trader and should register your business.

When you choose to do this can depend on your own circumstances.

For example, you might want to register because you need proof of self-employment to claim certain benefits, or because you want to make Class 2 National Insurance payments.

However, your earnings are also a deciding factor as to whether you need to register as a sole trader. Find out more about when you need to set up as a sole trader.

How to register as a sole trader

To register as a sole trader in the UK, the steps are as follows:

Step 1. Tell HM Revenue and Customs (HMRC) that you're self-employed and need to pay tax as a sole trader. You can do this by logging in to your Government Gateway account, or by creating an account if you don’t already have one, or by post.

Step 2. Complete the HMRC Self-Assessment form. You’ll be asked for some essential details, including your name, sole trader business name (if different from your own name), your address, and the nature of your business.

Step 3. HMRC will send you a Unique Taxpayer Reference (UTR) after you’ve completed and submitted the form.

Step 4. Once you’ve registered, you’ll need to complete a tax return each year through your online account.

How do I register a sole trader name?

If you want to operate under a business name rather than your own name, there are a few rules you need to follow.

To register with a sole trader business name, you’ll need to choose a name that’s not already in use. You can use a company name availability checker to make sure.

You can’t add ‘limited’ or ‘LLP’ to the name, and you should avoid using sensitive or misleading words or expressions in the name.

You’ll need to register your trading name with HMRC - either online through the government website or by completing a paper form.

Once registered, you can start trading and managing your finances as a sole trader, under your chosen business name. You’ll need to add your business name and your own name to any official business correspondence.

How long does it take to register as a sole trader?

It can take up to 15 days for HMRC to set up your Unique Taxpayer Reference (UTR), depending on whether you register online or by post.

However, you can complete the initial process of setting up as a sole trader in just a few hours. If you’re using a business name instead of trading through your own name, it’s worth setting time and thought aside for this before registering.

Does it cost to register as a sole trader?

Registering as a sole trader is free of charge. However, you’ll want to consider other costs associated with running a business before registering.

These costs might include business insurance, web hosting, professional consultancy, and any other services you need for your operations.

As a sole trader, you’ll also be responsible for managing your taxes and National Insurance contributions on your income.

Always keep detailed records of your business income and expenses, ready for completing your Self-Assessment tax return. You may want to consider investing in the services of an accountant to help you do this.

Can I be a sole trader and employed?

You can be both employed and a sole trader at the same time. This might apply to you if you’re launching your business while continuing to work as an employee, for example. As an employee, you would still have tax deducted from your salary by your employer.

As a sole trader, you’re responsible for completing a Self-Assessment tax return and paying any tax due on profits from your business, in addition to paying tax through PAYE.

It's also a good idea to tell your employer that you’re also working as a sole trader, to ensure there are no conflicts of interest with your contract.

What tax does a sole trader pay?

There are two main types of sole trader tax: Income Tax and National Insurance (NI) contributions (Class 2 and Class 4). The amount of tax you pay will depend on your trading profits, which is your total income minus business expenses.

There may be a personal allowance each tax year before you have to pay Income Tax. Once you go over that threshold, the rates will vary. Find out more about the latest tax rates.

If you’re based in Scotland, these tax rates will be slightly different, so you should refer to Scottish tax rates in your calculations.

Whether you need to pay Class 2 or Class 4 National Insurance contributions will vary depending on your earnings and profits. Consult gov.uk for latest rates.

Also, if your annual turnover is over a certain threshold, you'll need to register for VAT and collect VAT on your sales.

Understanding your tax obligations as a sole trader is an important part of running a successful business. An accountant can help you make sure you’re meeting all the necessary tax requirements.

Tax requirements depend on your individual circumstances and tax rules may change in the future.

How do I pay tax as a sole trader?

If you’re a sole trader, you’ll pay tax through the Self-Assessment system.

You’ll need to register with HMRC as a self-employed individual using their online portal. Throughout the year, it’s important to keep accurate records of your business transactions, including expenses.

Once you have filed your annual tax return, you’ll then need to pay any tax owed to HMRC, usually by 31 January each year.

If you have a business bank account, it can be easier to keep on top of your spending and expenses and budget for future expenses, such as tax you owe.

Many sole traders will ask themselves: do I need a business bank account ? While you may not legally need a business bank account as a sole trader, keeping your personal and business finances separate is likely to make life easier.

You should also check that your bank has no restrictions around using a personal account for business purposes first. If you have an existing business bank account, it’s also easy to switch to one that may suit your needs better.

Do sole traders pay VAT?

You must register for VAT as a sole trader if your turnover is over a certain threshold. Please check gov.uk for latest rates. You can voluntarily register for VAT if you want to, even if your turnover is below the threshold.

Sole traders might consider this if their clients prefer working with VAT-registered businesses. Being VAT-registered does mean more admin and record keeping, and you may need an accountant to help you fulfil your VAT duties.

Our award-winning HSBC Kinetic Current Account* can help you keep on track of cashflow and categorised spending, and you can apply in-app in minutes, with most accounts opened within 48 hours. For companies with additional needs such as multiple director shareholder businesses, compare HSBC business accounts here to explore your options.

*Subject to application, eligibility and credit check. T&Cs and fees apply.