How to register as a sole trader

What is a sole trader?

If you’re a sole trader (also called a sole proprietor) you’re the single owner of your business. You have no partners or directors, nobody looking over your shoulder (except maybe a helpful accountant). You’ve got complete authority over every aspect of your business. It’s your empire. You don’t have to run things solo to be a sole trader – you can hire employees. In other words the sole refers to the number of owners, not the number of people working in the business.

Many small businesses start off as sole traders. It’s also an easy option for contractors and self-employed people. As they grow they might decide to change their structure to a partnership or company.

Pros and cons of being a sole trader

If you choose to set up your business as a sole trader - as opposed to a partnership or company - there are some clear benefits.

Pros

• Startup costs are minimal
• You don’t have to register a company name or complete any Companies House forms
• There are fewer reporting requirements than other business structures
• As mentioned above, it’s all yours - the profits (and the losses)

But as with any business structure there are some downsides.

Cons

• The debts and liabilities are your personal responsibility and this may put your personal assets at risk if the business fails
• You’re responsible for the pension contributions for yourself and any employees
• If want to sell a stake to investors to get business finance, you’ll have to change your business structure
• If you want to sell the business this can be more difficult – especially if you have something that’s very niche – as you need to find someone willing to take over your unique dream

When do you need to register as a sole trader?

You need to register as a sole trader with HMRC if you earned more than £1,000 from self-employment in the past tax year, which runs from 6 April to 5 April every year. This applies even if your business is a part-time side hustle.

The latest you can register is by 5 October after the end of the tax year during which you became self-employed. You could be fined if you don’t register by this date.

How to set up as a sole trader

The process of setting up and registering as a sole trader is quite simple.

1. Choose a business name
2. Register as a sole trader with HMRC
3. Register for VAT with HMRC if your business turnover is over £85,000
4. Register as an employer with HMRC if you have employees
5. Have any licences and permits that your business might need to operate
6. Have any qualifications or registrations required for your trade or profession

1. Choose a business name

You don’t need to register a business name if you’re a sole trader. Your business name can be your own legal name – Charlie Cooper, for example. Or you can have a trading name that customers know you by such as Charlie’s Coffee Caravan. You must include your name and business name (if you have one) on official paperwork, such as invoices and letters. For example, ‘Charlie Cooper trading as (t/a) Charlie’s Coffee Caravan’.

Your business name can’t use offensive or restricted words. As a sole trader you can’t use ‘limited’, ‘Ltd’, ‘limited liability partnership’, ‘LLP’, ‘public limited company’ or ‘plc’ in your name. And you can’t infringe any trade marks. You can make a search on the UK Intellectual Property Office (IPO) website to check you’re not using a trademarked name.

2. Register as a sole trader with HMRC

When you register as a sole trader with HMRC, the registration covers both income tax Self Assessment and National Insurance. Depending on the size of your business, you may also have to register for VAT, and/or as an employer.

Register for Self Assessment

The simplest way to register as a sole trader is through the HMRC Government Gateway. You’ll need a Government Gateway user ID and password to sign in. If you don’t already have a user ID, you’ll be able to create one and then you can complete the sole trader registration form. Or you can complete the HMRC form 'Register if you're a self-employed sole trader' then print and post it to HMRC.

You’ll need to have your National Insurance number, the start date of your business, and the name and type of business for the registration. Once you’ve completed and submitted the registration form, HMRC will send you a 10-digit Unique Taxpayer Reference (UTR) and an activation code for your online account. You can then use this online account to complete your annual Self Assessment income tax return.

National Insurance Contributions

If you’re a sole trader and your profits are £12,570 or more a year, you’ll usually pay Class 2 and Class 4 National Insurance rates. These National Insurance contributions (NICs) are calculated and paid as part of your Self Assessment income tax return.

3. Register for VAT

You must register for VAT with HMRC if your annual taxable turnover is over £85,000, or you expect it to be. If your annual taxable turnover is less than £85,000 you can register voluntarily for VAT. This means if you sell to other VAT-registered businesses you can reclaim the VAT.

You’ll need a Government Gateway user ID and password to register for VAT. You can create one when you sign in for the first time, if you don’t already have one. Registering for VAT also creates a VAT online account.

Learn more about VAT in our guide.

4. Register as an employer

If you have employees you’ll need to register as an employer with HMRC. Then you’ll need to:

• operate a PAYE (Pay As You Earn) payroll scheme yourself, or find a payroll provider, to collect income tax and National Insurance contributions (NICs) from your employees and pay these to HMRC
• enrol eligible employees into a pension scheme and contribute towards it
• get Employers’ Liability (EL) insurance

5. Licences and permits

You may need licences or permits from central or local authorities to legally operate your business. The type needed will depend on your location and nature of your business. For example, licences are necessary for sale of alcohol, food premises, public entertainment, some types of beauty treatments, and for some types of locations such as markets or trading on the street. Charlie’s Coffee Caravan may need more than one licence.

6. Professional qualifications or registrations

Depending on your business, you may need a professional qualification or registration. For example, if you want to operate as a physiotherapist you need to be registered with the Health and Care Professions Council. Check with your industry bodies for their requirements.

Professional organisations, such as the Federation of Small Businesses, are a good source of advice, and your local Chamber of Commerce may be able to provide contact details for local business groups.