The complete step-by-step guide to setting up as a sole trader

The complete step-by-step guide to setting up as a sole trader

Ever dreamed of being your own boss? Setting your own hours? Turning that side hustle into a full-time gig? You’re in good company. 

There are currently more than three million sole traders operating in the UK, making it the most popular way to run a business. And it’s easy to see why - being a sole trader gives you total control, lets you keep all your profits (after tax, of course!), and comes with far less paperwork than setting up a limited company.

In this article, we walk you through everything you need to know about setting up as a sole trader, from picking a business name to staying on top of taxes and making sure you have the right insurance.

What is a sole trader?

A sole trader is a self-employed professional who runs their business as an individual, rather than part of a company or partnership. Unlike a limited company, there are no shareholders or company directors, and no legal separation between you and your business.

While this makes it the simplest form of business structure, it does also mean you’re personally responsible for any debts or liabilities your business might incur.

If you’re just starting out as self-employed, being a sole trader is likely the most straightforward and cost-effective way to get your business up and running. However, there are times when setting up as a limited company might make more sense - especially if you plan to grow your business, take on employees, or want to limit your personal liability. 

The good news is that you’re not locked in - you can start as a sole trader and switch to a limited company later if your business grows or your circumstances change.

If you’re not sure which business structure is right for you, we recommend taking a look at the guide linked below. 

Setting up as a sole trader step-by-step

Step one: Choose a name

Shakespeare once famously pondered, “What’s in a name?”. Well, when it comes to your business, the answer is quite a lot! Your business name is your brand, your identity, and how customers will remember you.

As a sole trader, you can trade under your own name or pick a unique business name. Just make sure it’s not already in use by another business and doesn’t include words that could mislead customers (like “Ltd” or “LLP”). You can also:

• Check Companies House to make sure your name isn’t taken by an existing limited company.

• Make sure your name isn’t already registered as a trademark.

• Check Google and social media to make sure your name isn’t taken by another sole trader or partnership. 

Step two: Register with HMRC

You’re required to register with HMRC and submit a self-assessment tax return if you make more than £1,000 per year. To register, you’ll need your national insurance number and a few basic details about your business. 

• Log in to your Government Gateway account, or create one if you don’t have one already. 

• Enrol for self-assessment by completing the online registration form on the HMRC website. You’ll need to provide details such as your name, address, date of birth, national insurance number, and a description of your business activities.

• HMRC will send you a Unique Taxpayer Reference (UTR) number by post, usually within 15 days. Keep this safe, as you’ll need it to file your tax returns.

• Once registered, you must file a self-assessment tax return each year to report your income and pay the appropriate tax and national insurance contributions.
  
  

Read more: The essential guide to self-assessment

Do sole traders need to register for VAT?

The requirement to register for VAT depends on how much money your business makes within a 12-month period. Currently, if your turnover is over £90,000 in any 12-month period, you’ll need to register to pay VAT. 

This means you always need to check your turnover for the last 12 months (e.g., from January to December, or February to January) to see if you’ve gone over the £90,000 threshold. It doesn’t reset at the start of a new tax year, so you need to keep an eye on it all the time.

Even if you don’t meet this threshold, you might choose to voluntarily register for VAT. It could be more tax-efficient for you if you have high expenses, for example, or it might be a good way to establish greater credibility. 

Step three: Find out what records you need to keep

Sole traders are legally required to keep accurate financial records for your business. Good record-keeping isn’t just about staying compliant with HMRC - it also helps you track your profits, manage cash flow, and prepare for tax season with less stress.

Here’s what you need to keep:

1. Income records

You need to keep thorough records of all the money coming into your business, including:

• Invoices issued to clients or customers.

• Sales receipts and order confirmations.

• Bank statements showing incoming payments.

• Any additional income from grants or government support.

2. Expense records

You can deduct business expenses from your taxable profit, so keeping proof of your spending is essential. 

Your expense records should include:

• Receipts for business-related purchases (e.g., equipment, stock, materials).

• Bills for services (e.g., phone, internet, rent for office space).

• Mileage logs if you use a vehicle for work.

You can find out more about allowable expenses on the gov.uk website. 

3. VAT and payroll records (If applicable)

If you’re VAT-registered, you must keep VAT invoices and receipts.

How long do sole traders need to keep records for?

HMRC requires sole traders to keep financial records for at least five years after the 31 January tax deadline of the relevant tax year. 

If HMRC investigates your tax returns, they may ask to see past records, so it’s important to store them safely.

Step four: Make sure you understand your tax obligations

HMRC liked to remind us once upon a time that ‘tax doesn’t have to be taxing’, but that doesn’t mean it’s always straightforward! 

Now you’re self-employed, you have to pay income tax on your profits - which are submitted to HMRC through your yearly self-assessment – along with national insurance contributions. Both of these taxes are paid at the same time. 

Tax dates for your diary

5th October: Self-assessment registration deadline
31st October: Paper tax returns due
31st January: Online tax returns due
31st January: First payment on account due
31st July: Second payment on account due

One thing that catches many new sole traders off guard is payments on account. If your tax bill is over £1,000, HMRC asks you to prepay towards next year’s tax in two instalments.

• 31 January: First payment on account (50% of your estimated tax bill for the next year)

• 31 July: Second payment on account (the remaining 50%)

• 31 January (the following year): Final balancing payment, if you owe more than estimated

This system helps spread the cost of tax, but it can be tricky to manage - especially in your first year when you’re paying tax for the past year and the first half of next year’s bill at the same time.

In order to make sure you’re not paying too much – or too little – tax, you’ll need a reliable method of keeping up with your accounts.

Although some people choose to rely on an accountant, there are plenty of free or low-cost tools out there that can help you keep accurate and up-to-date records. 

Step five: Make sure you have the right insurance in place

No-one likes to dwell on worst-case scenarios, but having the right insurance can protect you and your business from unexpected risks. As a sole trader, you’re personally liable for any debts or legal claims against your business, so insurance can provide essential peace of mind. 

Depending on the type of business you have, you might be required by law to hold certain types of insurance. Alternatively, a client may require you to hold a certain type of insurance before they agree to work with you.

Read more: What business insurance do sole traders need?

Here are some of the most common types of business insurance for sole traders:

Professional indemnity insurance: Protects you against claims of negligence, errors, or omissions in the services you provide. For example, if a client alleges that your advice led to financial loss, professional indemnity insurance would cover legal costs and any damages awarded.

Public liability insurance: Covers you for claims made against you by third parties for injury or property damage caused by your business activities. For example, if a client trips over your equipment during a meeting and injures themselves, this insurance would cover legal fees and compensation costs.

Income protection insurance: This policy provides a monthly benefit in the event that you become injured or ill, and are unable to work as a result. This means you can take the time you need to recover without having to worry about bills mounting up.

Not sure what type of insurance is right for you? Let’s figure it out