Ultimate Guide to becoming a self-employed Sole Trader

Making the leap to self-employment can feel scary. Stepping away from the reliability and security of Pay As You Earn (PAYE) employment has its risks but opens the door to a lot of opportunities. 

When making the decision as to whether or not you would like to go it alone, you’ll need to choose between running a limited company or a sole trader business.

Ultimate Guide to becoming a self-employed Sole Trader

Whilst businesses with multiple owners or higher risks most will usually use a private company limited by shares (known most commonly as a limited company), smaller businesses are more commonly associated with lower turnover and less risk. They do, however, always have a single owner.

What is a sole trader?

A sole trader is, quite simply, somebody who runs their business as an individual. It is often referred to as being ‘self-employed’.

If you choose to operate a business in your own name, you are classed as a sole trader. For legal purposes, both you and the business will be treated as the same entity too.

As a sole trader, you will be responsible for paying over the correct amount of tax on any money you make and will be personally responsible for any losses you make too.

UK Self-employment Statistics


What are the benefits of setting up as a sole trader?

There are several sole trader advantages that come with being self-employed. For example, you can start trading straight away without filling out mountains of paperwork.

You will have full control of your day. As your own boss, you have the total freedom to decide which customers you supply, how you deliver the work and what you charge.

There are also tax-related benefits that you can enjoy too if you work for yourself, that you wouldn't otherwise get over PAYE employment. 


Should I register as a sole trader?

You need to register as a sole trader if you decide to work for yourself. Although you don’t need to register as a sole trader straight away, you will need to register your business by 5th October in your business’ second tax year at the latest.

If you work in construction, you will also need to register for the Construction Industry Scheme. If you choose not to register for the Construction Industry Scheme, you will have deductions made for you at 30%, rather than the correct amount (20%).


How do I register as a sole trader?

Not sure how to set up as a sole trader? Our Sole Trader Registration service can take care of everything for you. All you need to do is complete the contact form and somebody from our team will give you a call. They will ask you a number of questions that are required by HMRC and then they will contact them for you in order to apply for a Unique Taxpayer Reference (UTR) number.

Your UTR number helps HMRC process your Self Assessment tax return and make sure that everybody pays the correct amount of tax and receives any refunds they are entitled to.

The entire process, depending on the time of year, will take between 2 and 8 weeks. But don’t panic, as we mentioned already, you can get to work immediately.    


Do I need insurance as a sole trader?

It is important to remember that as a sole trader, both you and your business are treated as a single legal entity. You will be completely responsible for the business and its finances.

Because there is no legal distinction between you and your business, your personal finances and assets could be at risk if your business fails. You should consider some form of insurance cover to protect yourself.

There are a range of sole trader insurances you can take out, should you wish to operate a sole trader business. Some of the most common insurances you might want to consider are sole trader public liability insurance and professional indemnity insurance.

  • Public liability insurance covers you against any compensation claims, should somebody be injured or have their property damaged as a result of something your business has done. You can insure yourself for between £1m and £10m, depending on the requirements of the customer and their contractual expectations.

  • Professional Indemnity insurance protects you if you operate a service-based business that provides advice and guidance to your customers. It will help cover the cost of compensation claims in the event that your advice causes your customer to lose money.


Can a sole trader have a business name?

When setting up as a sole trader business, people often trade under their own name. However, it can help your business appear more well-established if you trade under a business name too, so long as you follow certain rules:

  • You must not include any of the following terms in your name, ‘limited’ or ‘Ltd’; ‘limited liability partnership’ or ‘LLP’ and ‘public limited company’ or ‘PLC’.
  • The name you choose must not be offensive
  • You can’t suggest any connection with the government without permission

Registering your business name isn’t a requirement, but when it comes to any legal documents and paperwork, you must include both. For example, ‘[Full Name] T/a [Business Name]’.

Note: T/a means ‘Trading as’


How much tax should I pay as a sole trader?

When you are employed, your tax and national insurance contributions are handled for you. Moving into self-employment means you will manage these things slightly differently. Unless you have deductions made for you under on the Construction Industry Scheme, you will need to put money aside each time you are paid to account for your tax liability at the end of the year. 

The current tax-free allowance for everybody in the UK, whether self-employed or not, is £12,500. Up until you have earned more than the personal allowance, you will not need to pay any tax, although you may be subject to some national insurance contributions, explained later. 


Taxable Income

Tax Rate

Personal Allowance

Up to £12,500


Basic Rate

£12,501 to £50,000


Higher Rate

£50,001 to £150,000


Additional rate

More than £150,000


You can use our sole trader tax calculator here to get a better idea of the tax you’ll either need to pay over to HMRC or you’ll be able to claim back.


How much National Insurance do I have to pay?

If you’re self-employed, you’ll pay Class 2 National Insurance Contributions (NICs), so long as you have had at least £6,365 in profit. You will also need to pay Class 4 NICs on anything above £8,632.

Profit Band


National Insurance Class

Less than £6,365

£0.00 or voluntary class 2
payment of £3 per week

None / Class 2

£6,365 - £8,632


Class 2

£8,632 - £50,000


Class 4

Over £50,000


Class 4

Can I employ other staff?

Taking on new people is a great way to grow your business as it allows you to do more work, increase your production or add new skills to your offering. People often make the mistake of thinking that because they are operating as sole trader businesses, they can't employ other people. This isn't the case.

Whether you operate as a sole trader, a limited company or a partnership, you will need to pay your employees holiday pay and pension contributions for example. 


How do I complete a sole trader tax return?

If you’re a sole trader business owner, you'll need to pay your tax at the end of each year with a Self Assessment tax return.

  • Paper Self Assessment submissions - 31st October
  • Online Self Assessment submissions - 31st January

You can submit your tax return yourself, although it is always worth working with a knowledgeable tax expert to make sure you complete it correctly

They will also have a better understanding of all of the expenses you are allowed to claim back against your tax bill at the end of the year.

Read our Ultimate Guide to Business Expenses here to give yourself a head start!  


Why do my expenses matter?

When you work for yourself, you will come up against certain costs involved in the running your business. HMRC allow you to claim back many of these expenses, allowing you to pay less tax and make the most of your take-home pay. You may hear these expenses referred to as 'allowable expenses'. 

Allowable expenses can be claimed back against in your Self Assessment tax return. As a sole trader, you will pay income tax on your profit and any allowable expenses will be offset against the figure that you'll pay tax on. 

It is important you keep a detailed and accurate record of all your expenses as HMRC could ask to see them again for up to six years.

Do I need a sole trader bank account?

Many people who operate as sole traders mix their business and personal income and expenses. This can cause a number of problems at the end of the year when trying to reclaim allowable expenses and offset them against their tax bill as it can be difficult to remember which one was which.

It is good practice to have a completely separate business bank account that you use just for business purposes. Although it isn’t a legal requirement to keep a separate account, you will find that it makes a huge difference when it comes to producing your annuals accounts.

Depending on your financial circumstances, you will have different options available to you in terms of the kind of bank account you can get. Although a traditional high street bank may seem like a good choice, it is definitely worth looking at some of the challenger banks as they become more established.

Why do I need to record my travel as a sole trader?

As a sole trader, you might move from place to place for work. If you don't have a fixed place of work and often move from site to site, HMRC allows you to claim against the travel costs.

There are two ways you can go about claiming your travel expenses, either by keeping a detailed record of everything you spend on your vehicle throughout the year for business purposes (full receipted expenses) or by using a simple mileage log.

There are a number of mileage tracker apps available for Apple and Android phones which will use the phone’s location tracking to track your mileage automatically.

We created one of our own, LOGIT-IN, which you can download for free from the App Store or Android Store.

We're here to help you make the most out of every penny you earned as a self-employed sole trader. If you have any questions at all, please get in touch


VAT Domestic Reverse Charge Delayed until March 21

16 June 2020

A 12-month delay has been announced by the Government for the UK-wide rollout of the new VAT domestic reverse charge within the construction industry. The reverse charge had been set to come into force on October 1st, 2020.

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