How to register as a sole trader

Sole traders make up 60% of the businesses in the UK, and are easily the fastest growing sector. A December 2017 report from the House of Commons Library found that the number of sole proprietorships has risen 84% since 2000, compared to 59% for all businesses.

With this guide you’ll learn how to register and the pros and cons of becoming a sole trader.

What is a sole trader?

If you are the only owner of a business and make all of its decisions, you are a sole trader. Sole traders are self-employed and typically only employ a few people, if any.

There is not much difference between being self-employed and being a sole trader. Being a sole trader just means that your business is not a limited company or a partnership.

When do I become a sole trader?

If you earn £1000 or more from self-employment during the tax year you will need to register for Self Assessment with HMRC, even if you do not owe any tax. Your earnings might include freelance work or product sales and you will need to keep track of them.

You will also need to set up as a sole trader if you want to claim Tax-Free Childcare or make voluntary National Insurance payments.

When to register with HMRC

You will need to register by the October of your second tax year as a business. For example, if you start trading in January 2019, you will need to register by October 2019. After that, you will need to file a tax return every year.

Naming your business

You can trade under your own name, or choose another name for your business. You don’t need to register your business name, but you do need to be consistent across official paperwork and any branding, for example business cards and shop signage.

Don’t include words like ‘Limited’ or ‘PLC’ in your sole trader name as it is misleading. In a similar vein, you shouldn’t include sensitive words like ‘Architect’, ‘Doctor’ or even ‘Queen’ unless you have permission. You also can’t use any offensive words or existing trademarks.

If you want to prevent other people from using your business name, you will need to register a trademark.

Tax bands for sole traders

Sole traders are not registered with Companies House and are not liable to pay Corporation Tax, but do need to pay Income Tax.

Most people have a tax-free Personal Allowance of £11,850; after that, income tax is tiered.

  • If your income is between £11,851 and £46,350 you will be taxed the basic rate, 20%.
  • Between £46,351 and £150,000 you will be taxed the higher rate of 40%.
  • Income of more than £150,000 is subject to the additional rate of 45%.

Don’t forget that you will also need to pay National Insurance.

Do I need to register for VAT?

You must register for VAT if your turnover is over £85,000. Otherwise, you can register if it suits you – for example, if you want to claim VAT back from business purchases.

Sole trader vs limited company

It can be difficult to decide whether to set up as a sole trader or a limited company. Here are some of the pros and cons.

Pros

Being a sole trader is more straightforward and requires less paperwork than running a limited company. Many traders choose to do it themselves, rather than appointing an accountant.

Sole traders are afforded slightly more privacy than limited companies. When your business is registered with Companies House, its address and accounts are searchable by the public. As a self-employed person your finances are private.

If you have several small businesses – for example, if you are a writer and have an online shop – it’s much simpler to keep track of your finances as a sole trader, as you only have to fill one self-assessment.

Cons

The main downside of being a sole trader is that you are completely responsible for your company and have no limited liability. If your business fails, your own assets are at risk. If you are likely to build up significant business debts, incorporating a limited company may be a safer option – that way the debts are the company’s, not yours.

Some customers prefer to buy from registered companies. Incorporation can also make you look more credible to potential investors or business partners.

You may also find that as your business grows, you will pay less tax as a limited company. Corporation Tax is set at 20% compared to Income Tax, which is tiered.