How to become a sole trader: the complete guide

Want to start a business, but want to go in on it alone? You’ve come to the right place.

When you run a business alone, you’re known as a sole trader. It can be rewarding and liberating, but can easily go wrong if you don’t have a proper business plan, or you don’t manage your accounts and taxes properly.

But fear not – we’ll guide you through everything you need to know about becoming a sole trader, including how to register your business, understand your tax liabilities and other essentials to successfully manage and grow your venture.

What is a sole trader?

Put simply, a sole trader is someone who runs a business completely by themselves. You’re the boss, so that means you’re responsible for everything – from managing your finances and handling customer inquiries to dealing with taxes and making decisions on how your business operates. It’s also the easiest way to start a business, as there’s less paperwork involved compared to setting up a limited company.

The different types of sole traders

There are three main types of sole traders. These include:

• Freelancers: people who offer services on a project-by-project basis, such as copywriters, designers, web developers, photographers, videographers and more.
• Gig economy workers: an individual who works in short-term, flexible jobs, often through online platforms, such as Uber, Fiverr or PeoplePerHour. Rideshare drivers, delivery drivers, tutors and task-based workers are examples of gig economy workers.
• Tradespeople: skilled workers for hands-on jobs which often require specific skills or qualifications, such as plumbers, electricians, carpenters, mechanics and so on.

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

While the terms “sole trader” and “self-employed” are often used interchangeably, they aren’t quite the same thing.

A sole trader is a specific structure where you run your own business alone, taking on full responsibility for profits, losses and liabilities.

On the other hand, self-employed describes anyone who works for themselves, rather than being employed by someone else. A self-employed person can be a sole trader, but they could also be part of a partnership, where two or more people work together as partners, each contributing to the business and sharing its profit, losses and responsibilities.

So, while all sole traders are self-employed, not all self-employed people are sole traders.

The pros and cons of being a sole trader

Setting up as a sole trader is a popular way to get started as a small business owner, especially in these trying times when the cost of living crisis and inflation are causing people to look outside of their typical professions, even if it just starts as a side hustle.

Becoming a sole trader can be an important company structure to choose, either initially for your business in its early days, or as a permanent decision. It also comes with a ton of benefits too, including:

Pros of becoming a sole trader

• Easy set-up: it’s relatively easy to get started as a sole trader. You only need to fill in the relevant details on the HMRC website, and you can get started on your business almost straight away.
• You keep all the profits: unless you decide to hire part of full-time staff to help you run your daily operations, you’ll be able to keep all the profits you make from the success of the business.
• Flexible: it’s much easier to become a sole trader and scale up your structure when it’s necessary rather than having to dissolve a bigger company structure.
• Full control: you’re in charge of every decision, from how your business is run to how you spend profits. You have complete control over your marketing, pricing strategy and the direction you want to take.
• Direct client relationships: you can build personal, long-lasting relationships with your clients or customers. Being the sole point of contact allows you to better understand customer needs and provide a more tailored service, which can lead to repeat business, referrals and a good reputation within your industry.

Cons of becoming a sole trader

While there are undeniable advantages to becoming a sole trader, there are also some drawbacks to consider:

• Unlimited liability: you’re personally responsible for your business’s finances, including any debts or legal issues you face. This means that if your business goes bust and files for bankruptcy, you as the business owner are considered bankrupt as well. So much liability could also result in a sole trader selling high-value possessions (e.g. their car or home) to save their business from going bust.
• Lack of work-life balance: as you’re doing everything yourself, you won’t have the best work-life balance and you might end up working more hours than you would in a traditional job. Sole traders can also find it difficult to shut off from work due to the heavy responsibility involved.
• Harder to raise funds: it can be harder to secure financing or investment as a sole trader compared to a limited company. Lenders and investors often see limited companies as less risky because they offer a level of protection for personal assets. As you’re personally liable for business debts, it’s riskier for banks or investors to provide funding.
• Limited growth potential: you can only do so much yourself, and expanding your business might be challenging without additional help or resources. As you’re responsible for everything – including marketing, operations, customer service and finances – you may struggle to balance these tasks effectively, which could limit your ability to scale.
• Tax responsibilities: as a sole trader, you have to handle your own taxes and paperwork, which can be time-consuming and complicated. This includes keeping track of income and expenses, submitting annual self-assessment tax returns and ensuring you’re paying the correct amount of tax, including income tax and National Insurance Contributions (NICs).

How to register as a sole trader

You must register as a sole trader if you earned more than £1,000 from self-employment during the tax year. This begins on April 6th every year and ends on April 5th the following year. 

You must register as a sole trader by October 5th, or you may be liable for fines. Any further, more serious failures such as not submitting tax returns or purposely submitting them incorrectly could have more severe consequences, such as an audit, larger fines or even jail time.

To register your business correctly, simply follow these steps:

1. Create a Government Gateway account

Go to the government website to create your Government Gateway account. Once you’ve entered your business email address, you’ll receive your user ID.

2. Add a tax to your account

Log in to your Government Gateway account using your user ID and password. From there, you’ll see an option to “add a tax” to your account.

3. Select your Self-Assessment category

Here, you’ll need to select the relevant Self-Assessment category options: individual and sole trader, and partnership or trust.

What taxes does a sole trader pay?

Once you’ve registered as a sole trader and completed your self-assessment tax return, HMRC will set up tax records for you and will send you a Unique Taxpayer Reference (UTR). 

You should receive your self-assessment tax return in April. However, if it doesn’t arrive by the end of the month, contact your local tax office.

Income Tax

Income tax is a tax that’s payable on an individual’s earnings. The amount you pay depends on how much you earn during a tax year. Before filing your tax return, you’ll need to calculate your total income, minus any business expenses (e.g. travel, office rental cost, utility bills, etc.). For example, if you earn £30,000 in annual income, you’ll have to pay approximately £3,296 in income tax. 

National Insurance

You’ll also be liable to pay National Insurance Contributions (NICs) if you have profits above the Small Profits Threshold of £6,725 for the tax year. If this applies, you’ll have to pay Class 2 NI contributions at a flat rate of £3.45 per week. 

If your profits exceed £12,570 for the year, you’ll also have to pay Class 4 contributions. You’ll pay 6% if you earn up to £50,270 and 2% if you earn above this figure.

Value-added tax (if applicable)

If you expect to have a turnover of more than £90,000 a year, you’ll need to register for value-added tax (VAT). 

To register for VAT, you’ll need specific documentation, including your National Insurance number, an official form of identity (e.g. a passport or driving licence), your bank account details and your UTR.

After you’ve registered for VAT, you’ll receive information in the post from HMRC, including your 9-digital VAT number (which you must include on all invoices raised), how to set up your business tax account and confirmation of your registration date.

Once you’ve received your VAT number, you’ll need to sign up for a VAT online account.

Other sole trader essentials

Now that we’ve covered everything you need to know about registering as a sole trader and the tax implications involved, what else do you need?

Here are other consider when starting your sole trader business:

1. Accounting

Being a sole trader is great for flexibility and being your own boss, it can be a headache if you struggle with calculating taxes.

But despite the term “self-assessment”, you don’t have to do it all yourself. Instead, consider hiring an accountant to look through your finances and complete your returns correctly. They may even be able to give you some tips on minimising your tax payments.

Alternatively, you can invest in quality accounting software, such as QuickBooks, Xero or Wave to track your finances efficiently.

2. Marketing and branding

Strong marketing and branding are essential for getting your business noticed and standing out from your competitors.

Start by setting up your business website, or online store if you’re running an ecommerce business. Make sure to use a good-quality website builder and ensure that your website is user-friendly, easy to navigate and has strong, professional branding to resonate effectively with your target audience.

For the best low-cost marketing practices, you can carry out search engine optimisation (SEO) research and optimise your website for search engines. You should also set up relevant social media pages relevant to your target market. For example, if you aim to attract a Gen Z or younger audience, platforms like TikTok and Instagram would be the best avenues to promote yourself. 

3. Operational tools

This includes purchasing the relevant equipment, tools or software needed for your trade. For example, if you’re running a photography sole trader business, you’ll need to make sure you have the right equipment, such as good-quality cameras, tripods, lighting, and so on.

When it comes to handling clients, you should also make sure to have a standard template for a contract or terms of service. This will help you establish a legal framework, avoid conflicts and protect your rights if anything goes wrong. Moreover, consider investing in a CRM system, as this will help you to keep track of your clients, plus any leads or follow-ups.

Conclusion

All in all, becoming a sole trader is a great way to start your own business independently – whether you’re offering creative services, selling unique products or putting your DIY skills to good use. 

But while the set up may be quick and easy, it won’t be a complete walk in the park either. You’re completely liable if anything goes wrong, and as you’re doing everything yourself, you won’t have the best work-life balance either.

It’s also important to understand what taxes you are liable to pay as well and to ensure that you submit your Self-Assessment Tax Returns correctly, to avoid any fines or penalties. Other factors like marketing and operational tools should also be considered so you can promote your business and handle clients effectively.

Being a sole trader is a very up-and-down journey, but if handled correctly, you can successfully become your own boss while doing what you love.