Kristina Fox
If you earn more than £1,000 from self-employment each year, you will need to set up as a sole trader. Fortunately, this is a simple process and, once you’ve chosen a name for your business, the next step is registering to pay tax through self-assessment. Once registered, you will have to submit a tax return each year.
For example, if you earned more than £1,000 through self-employment in the 2023/24 tax year (which ran from 6 April 2023 to 5 April 2024), you will now need to register as a sole trader – assuming you haven’t already.
There are other ways to set up your own business, however, such as registering a limited company or a business partnership, so it’s worth checking which company structure could be right for you.
Setting up as a sole trader
When you first register as a sole trader, you’ll need to do the following:
- Choose a business name.
- Register for self-assessment.
- Find out what records to keep.
- Get to grips with expenses.
- Manage your accounts.
- Verify if you need to pay VAT.
- Consider opening a business bank account.
You can find out more about each of these processes in the sections below.
Choose a business name
When you’re a sole trader, you can trade as yourself or pick a separate name for your business.
However, there are some rules to follow when choosing a business name. You should do the following:
- Avoid certain words: As a sole trader, you must not include ‘limited’, ‘Ltd’, ‘limited liability partnership’, ‘LLP’ or ‘public limited company’ in your business name.
- Keep it clean: You must avoid offensive language.
- Check if you need permission: You may need permission to use certain words or suggest connections with local or national government – you can check here.
- Consider registering a trade mark: If you register your business name as a trade mark, it may be harder for other businesses to copy you.
You do not need to register your business name with Companies House. However, you must include your name (and your business name, if it’s different) on official documents such as invoices. What’s more, it’s good practice to be consistent so that your clients always know who is contacting them.
Register for self-assessment
Part of setting up as a sole trader involves registering to pay tax through the self-assessment system. You can submit tax returns to HM Revenue & Customs (HMRC), and also pay any tax and National Insurance contributions (NICs) you owe through this system.
Paying your tax this way is different to the Pay As You Earn (PAYE) system, which is used for employees of a company. This is where your tax and NICs are automatically deducted from your pay each month.
You can register for self-assessment on the Gov.uk website. You can file your tax return using the government’s online service, send paper forms by post, or use commercial software.
If you earned more than £1,000 from self-employment in the last tax year (6 April 2023 to 5 April 2024), you need to register for self-assessment.
You will also need to set up as a sole trader if you need proof of self-employment or if you want to voluntarily pay Class 2 NICs to help qualify for benefits and the state pension.
» MORE: Self-assessment tax returns: Who has to file?
Find out what records to keep
One of your responsibilities as a sole trader is to maintain accurate records of your financial activity. This includes your business income and expenses, as well as your personal income.
You must keep:
- proof of business sales and income
- records of allowable expenses
- VAT and PAYE records, if applicable
- records of your personal income
- records of funding you have received, including through the Self-Employment Income Support Scheme set up during the Covid-19 pandemic
You should keep records for at least five years after the online self-assessment deadline of each tax year, in case HMRC asks to see them at a later date.
For example, if you submit a tax return by 31 January 2025, you will have to keep your records until at least 31 January 2030.
You don’t have to submit these records with your self-assessment tax return, but they can help you work out the profit or loss you need to declare.
» MORE: Using a tax adviser or accountant for your tax return
Get to grips with expenses
If you buy items that are essential to the running of your business, you may be able to claim these as ‘allowable business expenses’. As a sole trader, you can deduct the value of these purchases from your income to work out your taxable profit.
For example, imagine your business had an income of £25,000 and allowable business expenses worth £4,000. You could subtract these allowable expenses from your income, making your taxable profit £21,000. This would be the amount you pay tax on.
Allowable expenses include paying for stationery, staff uniforms, travel costs, such as fuel or rail tickets (used for business travel), and fees for training courses. It can also include recurring costs, such as business bank account fees and business energy bills.
If you work as a sole trader from home, you may also be able to claim a percentage of your domestic bills, such as heating, electricity, council tax and broadband costs, as allowable expenses.
There is a list of examples on the Gov.uk website. Additionally, if you are unsure whether you can claim something as a business expense, you can contact HMRC’s Self Assessment helpline.
Manage your accounts
You can manage and track your finances through one of two accounting methods.
- Traditional accounting: Record income and expenses on the date you send an invoice or are sent a bill.
- Cash basis accounting: Record income and expenses when you receive the money or pay for goods and services.
If you run a small business with an annual turnover of £150,000 or less, it’s likely that you can use cash basis accounting. This means you only pay income tax on money you have received in your accounting period – you don’t have to account for money you have invoiced for but have not yet received.
If you feel you may need some help or advice with your accounting, consider consulting an expert, such as a bookkeeper or accountant, who can advise you on a method to suit your business.
» MORE: Do I need an accountant for my small business?
Verify if you need to pay VAT
If you’re a sole trader based in the UK, you must register for VAT if you have an annual turnover above £90,000.
You have to register if your taxable turnover for the last 12 months was above £90,000, or if you expect to exceed this in annual turnover in the next 30 days.
You can also choose to register for VAT if your annual turnover falls below this threshold. You may consider this if you want to sell to other businesses that are registered for VAT and then reclaim the VAT, for example.
There is more information about the criteria for registering your business for VAT on the Gov.uk website.
Consider opening a business bank account
When you’re a sole trader, it is not a legal requirement to use a business bank account. If you feel it’s more suitable for you, you can continue to use your personal current account for your business and personal finances – provided your bank allows this.
However, there are benefits to having a business account for your self-employment income. For example, keeping your professional and personal income separate means you can easily see which expenses relate to your business, so it may be easier to complete your self-assessment tax return.
But bear in mind that if you run a limited company then a business bank account is compulsory. This is also the case for limited partnerships and limited liability partnerships. In all cases, your company must be incorporated with Companies House, which means it becomes a separate legal entity – so it needs its own business bank account.
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