What is a sole trader and how do I register as one?

There are many benefits to becoming a sole trader, these include having complete control over their business, meaning they can make all the decisions about how their business is run. This includes things like what products or services they offer, how they market their business, and what prices they charge. sole traders also get to keep all of the profits from their business, after they have paid any taxes and other expenses.

Another advantage of being a sole trader is that it is relatively easy to set up a sole trader business. Compared to other business structures, there is less paperwork involved in setting up as a sole trader. This means that sole traders can get started with their business more quickly than if they were setting up a company or partnership.

Of course, there are also some disadvantages to being a sole trader. One of the main disadvantages is that sole traders are personally liable for all debts and losses incurred by their business. This means that if their business gets into financial difficulty, sole traders could lose their home or personal possessions. Another disadvantage of being a sole trader is that sole traders may find it harder to raise money from investors or lenders, as they are seen as high-risk businesses.

So, there are both advantages and disadvantages to becoming a sole trader. You will need to weigh up these factors to decide whether becoming a sole trader is right for you.

How to become a sole trader

Starting up as a sole trader is a popular way to become self-employed. This route can be especially attractive if you’re looking for low start-up costs, more flexible working hours, and the ability to be your own boss. Becoming a sole trader is relatively straight-forward; here are the key steps you’ll need to take:

1) Decide on your business structure. Are you going to be a sole trader, partnership, or limited company? Each has its own advantages and disadvantages, so it’s important to choose the right one for your business.
2) Register as self-employed with HMRC. This is essential in order to comply with tax laws.
3) Choose a business bank account. This will make it easier to keep track of your finances and meet reporting requirements.
4) Get insurance. Depending on the type of business you’re running, you may need public liability insurance or professional indemnity insurance.
5) Draw up a marketing plan. You’ll need to let potential customers know about your business, so make sure you have a plan in place to reach them.

Taking these steps will help you to get your sole trader business up and running smoothly.

Getting started

Getting started as a sole trader is simpler than setting up a limited company. You just need to choose a name and register with HMRC as self-employed. If you’re planning on using a business name, make sure it’s not already being used by another business and that it doesn’t contain any offensive or misleading words.

Before you can start a business, you need to have a clear plan for how the business will operate. This includes both a long-term vision for the company and a more concrete plan for the first few years of operation. Without a business plan, it can be difficult to secure funding or attract customers. But more importantly, a business plan helps to keep you focused on your goals and ensures that you are making progress towards them.

In addition to a business plan, you also need to have a good understanding of your cash flow. This means forecasting how much money you will bring in and how much you will spend each month. This is essential for two reasons. First, it allows you to see if your business is actually generating enough revenue to cover its costs. And second, it gives you a buffer against unexpected expenses. If you know that you have several months’ worth of cash reserves, you can rest assured that even if sales drop unexpectedly, you will still be able to meet your financial obligations.

You also need to be aware that you must display your own name as well as the trading name of the business on all business stationery. Once you’ve chosen a name and registered with HMRC, you can start trading.

What’s the difference between a sole trader and self-employed?

When starting your own business, it’s important to understand the distinction between being a sole trader and being self-employed. As a sole trader, you are the sole owner of your business and are responsible for all aspects of the business, from accounting to marketing. Being self-employed, on the other hand, means that you are not the owner of your own business but are instead contracted to work for another company.

This arrangement gives you more flexibility in terms of how you work, but it also means that you are not protected by the same legal protections as a sole trader. It’s important to weigh up the pros and cons of each option before deciding which is best for your business.

The advantages and disadvantages of a sole trader

Here we’ll quickly run you through some of the key advantages and disadvantages of being a sole trader.

Advantages of being a sole trader?

You’ll be in total control 

Becoming a sole trader means you’ll be starting a business and you’ll be the boss of it. Becoming self-employed allows sole traders to take full control of their business ventures, meaning they can ensure it runs exactly how they want it to.

Having such a high level of control over their own business is what leads so many people to becoming a sole trader. Being a sole trader offers a further amount of flexibility than running your own business in the traditional sense, too, so you may just find that you’ll have a new sense of freedom when it comes to your time.

You get to keep your profits

After paying tax on them, if you’re a sole trader, you’ll be able to keep all of your business profits. This is what differs it from a partnership business and other setups where profits are shared out between multiple individuals or groups. As a sole trader, you’ll be the one keeping hold of your profits as you’ll have nobody else to share them with.

This is one of the clear monetary rewards of being a sole trader and something that entices many people to become one.

The start-up costs will likely be low

Registering as a sole trader is extremely affordable and the overall setup costs are very low in most cases. Registering with HMRC is free, for example. Limited companies have the additional cost of registering with Companies House, though sole traders get to avoid this extra charge as they don’t have to do so.

Another benefit of not having to register with Companies House is that you’ll have a greater level of privacy within your venture. If you’re not registered with them they won’t be able to hold your details in their database.

Changing your mind? That’s okay

Many people that become a sole trader often start it as a part-time role, which allows them to remain employed and earn some guaranteed money from their current, risk-free job. When their sole trader role starts providing them with enough money to make a living, they’ll normally switch to doing that full-time, which makes complete sense.

What’s more is that as your sole trader business grows and expands you can quickly transform it into a limited company if you wish to do so. This once again offers large degrees of flexibility.

Disadvantages of being a sole-trader?

There’s a downside to everything, so we’ll now take you through some of the negative aspects of being a sole trader.

Complete liability

A key negative aspect of being a sole trader is undoubtedly the fact that it leaves you with the full liability for your business. If you end up owing any amount of debt or if any claims are made against you, you may end up finding your assets and finances at great risk.

In the very worst-case scenario this could lead to you losing your income and any personal assets you have, such as any cars or even your home. As a sole trader, you have a really low amount of financial stability and protection.

Tax limitations 

In comparison to limited companies, sole traders aren’t the most tax-efficient business models. The higher the amount of profit you earn as a sole trader; the higher amount of tax you’ll have to pay comparably. This means that sole traders generally have less flexibility of being able to maximise when compared to limited companies.

Securing problems

Securing funding as a sole trader is typically complicated as most traditional lenders, such as high street banks, are less prone to offer loans. Sole traders are viewed as uncertain due to the structure of their business, so are often lent less money. It may lead to higher interest rates and shorter repayment periods.

It is important to note that banks still do lend money to sole traders, it’s just that usually a lesser amount, has a shorter repayment period and can come with higher interest rates. Otherwise, you could apply with an alternative lender to secure sole trader funding or a business loan.

More responsibility means more work

As a sole trader you may well find yourself with a poor work-life balance and find yourself with a sheer lack of time to do things in your personal life.

Many sole traders sacrifice off-time to relax, such as holidays, as they believe that time away from work may be ultimately damaging to them. Also, nobody else is going to be responsible for paying for your holiday days throughout the year, so you may be even less inclined to take them because of the money you’ll most likely lose out on.

How to register as a sole trader

A sole trader simply notifies HMRC that they intend to start working for themselves, essentially telling HMRC they are becoming “self employed”. HMRC will ask if the sole trader business intends to have a “business name” or “trading style”, but this is not in order to register the business name and HMRC will not alert you if there are other businesses using the same name.

The only proof that you will get that you have registered as a sole trader is a Unique Tax Reference (UTR) number. HMRC will send this to you around 10 days after your sole trader registration has been completed. Unlike with a limited company there is no certificate, or other documentation, to show you are registered as a sole trader. Also unlike a limited company there is no public list of sole traders that anyone can look you up on and no public database they can look your UTR number up on.

In order to formally become a sole trader in the UK, you will have to alert HM Revenue and Customs (HMRC) of your intentions. You will then pay your taxes through HMRC and also register for self assessment through it. After doing this you should be aware that each year you’ll be expected to file a tax return which includes multiple responsibilities:

• Keeping records of your business’ sales and expenses.
• Sending a Self Assessment tax return every year.
• Paying Income Tax on your profits and Class 2 and Class 4 National Insurance.

To ensure you’re fully adhering to the rules, you can look up the government’s official guide on doing so.

How much tax does a sole trader pay?

The amount of tax paid as a sole trader you will need to pay income tax, as well as Class 2 and 4 National Insurance (NI) contributions, on all taxable business profits.

Income tax

If your earn less than £100,000 as sole trader income a tax year you will benefit from a personal allowance (or tax-free income), which for the current year is £12,500.

Sole traders that earn over £100,000, this allowance decreases by £1 for every £2 of income over £100,000. income over over £125,000, you don’t receive a personal allowance.

The amount of income tax that you pay depends on your income after this personal allowance.

The following table is useful:

Band	Taxable income	Tax rate
Personal allowance	Up to £12,500	0 per cent
Basic rate	£12,501 – £50,000	20 per cent
Higher rate	£50,001 – £150,000	40 per cent
Additional rate	Over £150,000	45 per cent

Example:  Sarah works as a self employed hair stylist who made a £19,000 profit last year. One she has subtracted her personal allowance, the taxable income is £6,500. This falls into the 20 per cent band, meaning that she will pay £1,300 in tax.

Class 2 and 4 NICs

II your sole trader business profit is over £6,475, Class 2 NI contributions are needed to be paid, this is currently £158.60 a year. Profits that are over £9,500, then you will also be required to pay Class 4 NI contributions, these are calculated as a percentage of your total profits during your Self Assessment.

How do sole traders pay tax?

Sole traders pay tax and National Insurance on their profits. They will need to complete a Self Assessment tax return every year. This is usually done online.

Once you have completed your Self Assessment, you will need to calculate the tax you owe. You can then pay HMRC using a debit card, credit card, online banking, CHAPS or by visiting your bank.

If you are paying by post, you will need to make sure that your payment arrives on time. HMRC charge interest on late payments.

There are also different ways to pay if you are a limited company. You will need to pay Corporation Tax on your company’s profits. This is usually done through your company’s bank account. You will need to set up a Direct Debit to make sure that your payments are made on time. HMRC charge interest and penalties for late payments of Corporation Tax.

What expenses can you claim back as a sole trader?

As a sole trader, there are a number of expenses you can claim back against your tax. These expenses can be divided into two categories: general expenses and expenses related to your vehicle. General expenses include items such as office supplies, membership fees, and accountancy costs. If you use your own vehicle for business purposes, you can also claim back expenses such as fuel, insurance, loans, and repairs.

In addition, you can also claim a portion of your mortgage or rent payments if you work from home. When calculating your taxes, it’s important to keep track of all of your expenses so that you can deduct them from your gross income. By doing so, you can ensure that you only pay tax on the money that you actually earn.

What accounts do sole traders need to keep?

As a sole trader, you are required to keep a detailed record of all your business income and expenses. This includes original invoices and receipts. You will need to submit these accounts to HMRC during your tax return. However, you don’t need to submit as many accounts as limited companies. This is because sole traders are not required to submit audited accounts or annual returns.

Instead, you only need to submit your accounts when you file your tax return. This makes it simpler and easier for sole traders to comply with their tax obligations.

Do sole traders need a dedicated bank account?

Sole traders need a dedicated bank account. While it may be tempting to use your personal bank account for your business transactions, this can quickly become confusing and make it difficult to track expenses. A dedicated business bank account makes it easy to keep track of income and expenditure, and it also sends a strong message to HMRC that you are serious about running a successful business.

While sole traders are not legally required to have a dedicated business bank account, it is highly advisable to open one as soon as possible. When choosing a bank, be sure to research challenger banks that offer competitive rates and plenty of features designed specifically for small businesses. by doing so, you can ensure that your sole trader business has the best possible chance of success.

Do sole traders need an accountant?

Sole traders need to submit a self-assessment to HMRC every year, detailing their income and expenses. This can be a complex and time-consuming process, but an accountant can help to make it simpler. An accountant can also keep track of your invoices and expenses throughout the year, making it easier to stay organized and spot any potential deductions.

In addition, they can calculate how much tax you need to pay, taking into account personal allowances and tax-deductibles. Staying on top of your tax and accounts is particularly important for sole traders, since you’re personally liable for any debts. But accountants can also help you save money, making sure your business is as tax efficient as possible. As a result, an accountant can be a valuable support system for any sole trader.

Can I get sole trader insurance to protect me?

Being a sole trader comes with a lot of responsibility. Not only are you liable for any debts or damages incurred by the business, but you’re also at risk if you find yourself unable to work. For these reasons, it’s worth taking out business insurance as a sole trader. What you need depends on your business, but the four main types of insurance worth exploring include :

• Employer’s liability insurance
• Public and product liability insurance
• Professional indemnity insurance
• Building and contents insurance

There’s no one-size-fits-all when it comes to business insurance, so make sure you speak to an expert to find the right policy for your needs.

Read more: Apply for a sole trader business loan

When should I change from sole trader to limited company?

Starting out in business as a sole trader is a good place to set off from with your first set up your business. However, as your profits grow, you could lower your tax bill by becoming a limited company. This will also give you limited liability, which means better financial security, as well as greater borrowing power and more competitive credibility.

But some people are happy staying sole traders and don’t want to change to a limited company. If you think you’re ready to change from being a sole trader to a limited company, speak with your accountant about it. They’ll assess whether your company is in a good financial place to change and offer you informed advice on the next steps.