How To Setup Business As A Sole Trader In The UK

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Starting your own business as a sole trader comes with many different benefits, such as being your own boss, setting your own work hours and calling all the shots yourself.

And unlike forming a limited company, being a sole trader means you’ll face less tape and paperwork, be exempt from Corporation Tax and retain your privacy by not having your information shared publicly on Companies House. 

There are a lot of positives to being a sole trader. And the good news is that it’s pretty quick and easy to get started. So, let’s dive into the facts and how to setup business as a sole trader. 

How to setup a business as a sole trader

Starting a business as a sole trader isn’t as daunting as it may seem. In fact, the legal part of it will take just minutes to complete. 

However, to ensure you don’t get thrown in the deep end without a lifejacket, we’ve created a simple 5 step process to teach you how to swim and ensure that your business gets off to the best start possible. 

1. Get your idea nailed 

You can’t have a business without a business idea! Whether you’re thinking about designing shoes, selling time-management software or becoming a candle stick maker, you need an idea. 

As the first step in how to setup business as a sole trader, this might be something that you’ve already nailed, in which case, skip to the next step!

But if you’re still deciding what might be a good fit for you, it might be worth looking at Startup Hive’s list of offline and online business ideas to see if any spark that fire. 

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2. Think of a name

Now you know what you want your business to do, it’s time to give it a name!

As a sole trader, your legal trading name will be your name. However, that doesn’t mean you can’t use a ‘trading as’ name if you want to give your business a catchy, more meaningful name.

In an ideal world, the name you give your business will be:

  • Short, catchy & easy to remember
  • Explain what your company is/the services you provide
  • Unique and not easily mistaken for something else

But sometimes those rules have to be broken – and using your own name is a great example of this. But if people hadn’t named companies after themselves, there would be no Gucci, Ferrari, or Boeing. 

As a startup sole trader, however, it might be worth adding a little more context to your name. So instead of just “Bradley”, you might want to go for “Bradley Dog Walking Services” to make that connection a little bit easier for your customers. 

Generally, as long as the name works for you and your customers, isn’t already in use or breaks any HMRC rules (i.e. not offensive or including false information such as ‘LLP’), then go for it. 

More tips on how to come up with a catchy business name can be found here

3. Make a plan

Now, the hard part is figuring out how to turn that vision into reality. Yep, it’s time to make that dreaded business plan

A business plan is a written document summarising your business, what your products/services are, who your customers are, how your business works, how you will target your customers and more.

It’s basically there to really nail who you are, what your goals are and how you will reach them.   

It’s tempting to skip this step. After all, who has time to write everything down when you’re excited to start your business? But trust us – this step is worth it. Did you know that: 

In summary, business plans are good and worth the time and effort. To help make it less of a chore, Startup Hive have a free business plan tool to get you started. 

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4. Register with HMRC

Now, it’s time to make it official. As the fourth stage in our “how to setup business as a sole trader” guide, you may be expecting a big song and dance for this step. Well, you might be a little disappointed.

In order to register as a sole trader, all you need to do is tell HMRC that you’ll pay your tax through Self-Assessment

That’s it. It’s an online form that takes mere minutes to fill. It’s pretty anticlimactic as far as setting up a business goes.

Once done, you’ll get your Unique Taxpayer Reference (UTR), which you will need to use to complete your self-assessment tax returns every year. 

If you’re working in the construction industry as a contractor or subcontractor, you will also need to register with HMRC for the Construction Industry Scheme (CIS). You can also voluntarily register for VAT if you want, but for most startup soe traders this won’t be a decision you need to make just yet.

Pst, you can find out more about VAT registration and when you might want to voluntarily register here.

5. Start trading!

Now, it’s time to start running your business. And thanks to that handy business plan you wrote earlier (thanks step 3!), you’ll already know how you’ll be marketing your business and start drawing your first customers or clients in. 

It might be intimidating. It is, after all, the final step in how to setup business as a sole trader in the UK.

Remember, not everyone is a natural-born marketer. And some of the biggest hurdles when starting a business can come from getting started promoting your business. So, to get you started, we’ve highlighted some of our best guides to marketing your business online: 

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The pros of being a sole trader

As we stated earlier, there are a lot of benefits to being a sole trader. These are just a few of the biggest ones: 

  • It’s easy and simple to get started. Unlike forming a limited company for example, you will have less paperwork and hoops to jump through to become a sole trader. Just come up with a name, an idea and a plan – let HMRC know and you’re good to go!
  • You’re your own boss. You decide when, how and how much you’ll work. You don’t have to fake being sick or bend over backwards to fit in a doctor’s appointment here. It’s all under your control. 
  • You call the shots. All decisions are yours – giving you the ultimate power and say of how your business is run. 
  • You keep all the profits (after taxes!). The better your business does, the more you profit. 
  • There is less admin and paperwork to do, giving you more time to focus on your business’s day-to-day operations. 
  • It can be more cost-effective to run a sole tradership, as there are fewer legal and accounting requirements, which means less money spent on accountants or accounting software. 
  • A more friendly option for clients. Some some customers prefer dealing with individuals rather than companies – which could make you a more attractive option for your customers!

It’s easy to see why 60% of all small businesses in the UK are currently set up as sole traders.

The downsides of being a sole trader

Being a sole trader isn’t for everyone. Although it’s easy to set up and run, you need to be aware of the drawbacks to being a sole trader. 

  • You’re legally responsible for your own company, which means that any debts that your company may acquire are yours too. You can’t take all of the profits and none of the debts I’m afraid. It works both ways. 
  • You don’t have a fixed income. You make money from the company profits, rather than taking a traditional wage. So if business is slow, your wallet is going to start getting very light. 
  • Higher profits mean more tax. The more profit you earn, the more you will owe in tax. Sole traders are responsible for paying Income Tax, Class 4 National Insurance and VAT (if registered). If your profits are high, you will end up paying ore in tax than a limited company. 
  • Sole traders struggle to land big clients. Although you might seem friendlier to some customers, if you’re looking to land high-profile clients, they might see you as a little guy and dismiss your company over other limited company options. 
  • You need help accessing finance, as certain business schemes and loans are unavailable to sole traders. If you’re looking for finance options, you may have to take out personal loans with higher interest rates. 
  • You can’t sell the company. You are the company, which means that legally – no one else can own it. 

In addition, it can be harder for sole traders to get the work/life balance right. Because you don’t have a fixed wage, many sole traders forgo days off to secure their income, which can cause stress and burnout if you’re not careful.

Can you employ someone as a sole trader?

We’ve only scratched the surface of how to setup business as a sole trader. Despite the name ‘sole trader’, you don’t have to do everything alone.

A sole trader means that the business is owned and operated by yourself, but there are no restrictions on hiring employees if you want to grow and expand your business. 

To hire someone as a sole trader, there are two simple steps that you have to follow. First, you need to register as an employer with the HMRC. (Yep, you need to register everything with the HMRC). 

Secondly, you must register for PAYE to pay your employees’ salaries. And trust us, you don’t have to be an accounting whiz to get PAYE right.

Setting up payroll isn’t as complicated as it used to be, as there are lots of software options to choose from that will automatically pay your employees using PAYE. Some accounting software systems will also have payroll abilities as part of their services, allowing you to kill two birds with one stone. 

Looking for the right accounting software? Find out which accounting software is the best for UK sole traders with our tried and tested reviews here

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

A sole trader is a type of business structure, meaning that the business is fully owned by a single person. Self-employment is a type of employment, which describes how you work (and what taxes you pay!). 

There’s a lot of overlap here, and you can be both things at once. The core difference between a sole trader and self employed is that one term describes your business, while the other describes your personal employment status. 

Can you lease a car as a sole trader? 

If you need a car for your business, consider taking out a business car lease. As a sole trader, you are automatically eligible for business car leases—unless you’re a taxi driver. With the high mileage standard taxis do, leasing a taxi would be incredibly expensive so most brokers won’t offer it as a service. 

Instead of buying a car outright, leases give you the option to pay with monthly instalments that could better suit your budget and cash flow. With business leases as a sole trader, you can expense your miles and reclaim your monthly VAT (if you’re VAT registered!). You don’t have to pay any company car tax either, potentially saving money. 

Find out more about leasing a car as a sole trader here. 

Do you need business insurance as a sole trader? 

Technically, sole traders aren’t legally obligated to have business insurance unless they are contractually obligated to, such as Professional or Public Liability Insurance, Cyber and Date insurance if you handle client data or employers’ liability if you hire employees. 

Even if none of the above applies to you, it can be useful to have business insurance to protect you against the worst and help you sleep a little better at night. Find out what types of business insurance you can have as a sole trader and if they will benefit your business here

What are the legal obligations of a sole trader? 

As a sole trader, you will be legally responsible for:

  • Registering for self-assessment with HMRC and submitting your self-assessment returns every year
  • Paying your Income tax and Class 4 National Insurance contributions 
  • Registering for VAT (if required) 
  • Registering for PAYE (if you employ others) 
  • Checking for and acquiring any licenses (such as selling alcohol, paying music in-store, or for the software you use) 
  • Taking out any required insurance (such as employer’s liability insurance)

For the most part, being a benign sole trader just means keeping on top of your self-assessments and paying your taxes on time. The best way to do this is by investing in accounting software to keep your books up to date and make your returns a breeze. 

Do you have to pay National Insurance as a sole trader? 

Yes, as a sole trader, you need to pay Class 4 National insurance contributions. As we outline in our guide to National Insurance for self-employed, Class 4 contributions are calculated based on your income. 

  • Annual income under £12,570 falls under a personal tax-free allowance.
  • Annual Income between £12,570 and £50,270 is charged at a higher rate of 8%.  
  • Annual income over £50,270 is charged 2%. 

Previously, sole traders had to pay both Class 4 and Class 2 National Insurance rates. However, Class 2 was abolished in 2024, allowing sole traders to keep more of their profits. 

Do you need to set up a business bank account as a sole trader? 

No, you don’t have to setup a business bank account as a sole trader. Technically, you can use your normal personal account unless you have a restriction that the account isn’t to be used for business use.

You better check out that fine print before you start making any transactions. 

However, setting up a dedicated business bank account can make your life much easier, as your cash flow will be much easier to manage. 

How do I set up a business bank account as a sole trader? 

Setting up a business bank account is similar to applying for a personal one. You’ll choose a bank, supply your personal details and business information, and then wait to get accepted. 

There are many options for choosing a bank account as a sole trader, with many banks also offering deals such as free accounting software to help you save money and manage your finances.

For example, NatWest owns FreeAgent and freely gives out subscriptions to the software with all new business current accounts. 

When looking at the business bank offers, you should remember that modern online banks like Tide should also be considered. Unless you really need to walk into a branch (when was the last time you did that anyway?), online banking solutions can be much faster and quicker to set up. 

If you don’t fancy going through the paperwork of setting up a bank account, then you’ll be happy to find out that many business formation agents can also apply on your behalf as part of their ‘Fast Track’ business bank account applications. 

Is setting up as a sole trader permanent? Can I change to a limited company later? 

Sole traders aren’t set in stone for eternity. If you need to make any changes down the line, whether that’s pausing trade, changing your name or closing shop to open a new venture – you’re free to do as you wish. 

You can also change the company structure of your business if you want, moving from a sole trader to a limited company. This is a popular option with many businesses, as the added liability protection and tax benefits of a limited company can become very attractive as your business grows in size.

We’ve published a guide about the best time to move from a sole trader to a limited company, and one of the biggest reasons to change from one to the other is when profits reach the Higher Income Tax rate, as you will lose a lot of your earnings through income tax as a sole trader. 

If you do want to switch, the process is simple. You need to form a limited company under the same name, inform HMRC of the change and de-register as self-employed, as you will now be paid as an employee of your limited company. 

To help complete a full changeover in a few hours, we’d recommend using a company formation agent to carry out the entire process for you. They’ll be there to set up your new limited company, fill out all the paperwork and free yourself of the stress, time and effort. 

You can find the best company formation agent for your business here. 

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How to setup business as a sole trader

Setting up a business as a sole trader is a relatively simple process. All you really need to do is inform HMRC that you are self-employed and fill out your self-assessment tax returns every year. 

The hard part comes from knowing what to do to get your business off the ground and running. Part of this is making a plan and mapping out your goals, while the other half is getting to grips with marketing and promotion and utilising all the tools at your disposal to make running your business easy.

This includes business bank accounts, accounting software, and company formation agents to handle the paperwork. 

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Author
Business4Beginners has been advising new businesses owners since 2013. The founder, Paul Bryant, has created, grown and sold several successful businesses and remains the editor and fact-checker of all content published on the site.
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