How to register as a sole trader in the UK

What is a sole trader?

A sole trader is a business structure that allows somebody to do business “as an individual.” In other words, instead of you “the business” and you “the person” being separate legal entities, the two mostly blend together. Sole traders have unlimited liability.

Sole traders still need to file a tax return and it's advisable for them to take steps to be professional, like taking out an insurance policy and opening a business account. However, there are definitely fewer requirements compared to other business structures.

When you need to set up as a sole trader

As soon as you earn more than £1,000 from self-employment in one tax year, you should register as a sole trader (or some other kind of business structure).

At the very latest, you should register by 5 October in your second tax year.  If you leave it later than that, you might be fined.

The tax year starts on 6 April, so if you start earning money from self-employment in May, you have until 5 October the following year to register. 

But before you rush off to register  you need to be sure that being a sole trader is the right business structure for you.

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

Self-employment can refer to those who act as sole traders, but it isn’t the only type of self-employment.

Self-employed people may also operate through their own limited company, an umbrella company (used for contractors), or a partnership.

Can I give my sole trader business a name?

When you register as a sole trader, you’ll choose the option to choose a name that you do business as, but you don’t need to register a company name. There are a few rules, such as not using an existing trademark and not using terms like “limited.”

Pros and cons of being a sole trader

Being a sole trader is perfect for some, but not everyone – this will come down to your circumstances.

What are the advantages of being a sole trader?

One of the main benefits of being a sole trader is the convenience and ease of setting up your business when you’re a sole trader. You only need to answer a few questions to register – there’s no need to register a company name or choose shareholders.

There is also less administration to worry about. Sole traders only need to file their self assessment tax return every year, while other business structures have a lot more paperwork to do. As a result, they have fewer accountancy fees and other administrative costs.

Plus, sole traders can still use independent contractors or hire employees.

What are the disadvantages of being a sole trader?

The main drawback to being a sole trader is the financial risk involved. As a sole trader, you technically have unlimited liability – meaning that if your business goes into debt or faces legal action, you’re personally responsible. This isn’t the case with other business structures, such as limited liability companies.

How to set up as a sole trader

It’s quick and easy to set up as a sole trader. 

Once you’ve decided it’s the right choice for you, just follow the steps below:

1. Let HMRC know that you want to pay tax as a sole trader by logging into your Government Gateway account (or creating a new account).
2. Fill out the HMRC self assessment registration form (online or by post), which involves providing key details about your business.
3. Wait for HMRC to send a 10-digit unique taxpayer reference and activation code.
4. Activate your online account.

Sole trader set up checklist

After you’ve registered as a sole trader, check you have the following:

• UTR number
• Invoicing process
• Record-keeping system
• Business account (optional)
• Business name (optional)
• Insurance (optional)

How long does registration take?

Registration should be a quick process that takes 1–3 hours. However, it can take up to 15 days to receive your Unique Taxpayer Reference.

What records do I need to keep?

When you set up as a sole trader, it’s important to make sure you’re on top of your record-keeping. You need the following:

• Receipts or invoices of any business expenses
• Bank account statements of your business account
• Records of your income and expenses

If you’re an ANNA customer you can snap a pic of your receipts in the app, and they’re automatically categorised and stored, and it’s incredibly easy to create, send and store invoices. 

How much tax will I pay?

Tax isn’t overly complicated  when you’re a sole trader. You only need to worry about income tax and National Insurance, so the system shouldn’t be too unfamiliar for those transitioning from employment to self-employment.

As with other taxpayers, sole traders in 2025 have a personal allowance of £12,570, and they pay the basic tax rate of 20% for amounts between £12,571 – £50,270. They face the higher tax rate of 40% for amounts between £50,271 – £125,140, and the additional tax rate of 45% for anything above this.

Sole traders who earn above £12,570 have to pay Class 4 national insurance contributions. As of April 2024, those who earn above £6,725 are deemed to have paid class 2 national insurance without being charged, and those earning below this can make voluntary contributions if they want.

You can find the latest income tax rates and personal allowances on the HMRC website.

Sole traders also have an optional personal allowance of £1,000 for their business expenses, which you don’t have to itemise. If you want to claim more than £1000 for your business expenses, you have to itemise every expense you’re claiming. 

Your responsibilities after registration

After you register as a sole trader, there are still a few considerations. 

Tax Deadline

One of your key responsibilities as a sole trader is to ensure you keep up with income tax deadlines. The tax payment deadline is 31 January following the end of the tax year.

Many sole traders pay their income tax in 2 installments, so there’s also a deadline on 31 July for the second installment.

VAT

You only need to register for VAT as a sole trader if you have an annual turnover of £90,000 or more. Although you can register for VAT if you earn less if you think it’s the right thing for your business. 

To register, head to the HMRC website to create your VAT online account.

Cost of setting up a sole trader business

It’s free to register as self-employed.

Software and services you'll need

While it’s not a legal necessity to have any software or services as a sole trader, it can sure make life easier. You may want to use website hosting, marketing tools, or an invoicing platform, for example.

ANNA is a business account designed for small businesses, and it also offers additional features to help with your admin:

• Receipt scanner
• Invoicing
• Pots to put money aside for taxes
• 24/7 customer support for all the questions you might have

What expenses can you claim back as a sole trader?

Sole traders have the chance to claim various business expenses against their profits, which helps you lower your tax bill.

Some of the most common business expenses include:

• Utility bills for office premises
• Business phone 
• Office supplies
• Vehicle expenses for business travel
• Business insurance
• Software and subscriptions

What accounts do sole traders need to keep?

Thanks to the simple accounting requirements, sole traders only need to keep track of their income and expenses. In some cases, you may also need to track mileage and VAT. The great thing about an ANNA business account is that it automatically matches receipts and invoices to your transactions, so your accounts practically do themselves. 

Do you need a business bank account?

While sole traders can technically use their personal bank account for business purposes, it’s much better to set up a separate business account to simplify your accounting when the tax year comes around. The last thing you want to be doing is going through your bank statements, trying to work out what was a business transaction and what was a personal transaction. 

It’s also a good idea to set aside some money in this account for your tax bill.

Insurance

You may want to consider taking out a business  insurance policy. This is especially important if you carry out your services in a physical premises, see customers in person, or hire employees, as this increases liability risk.

Even if your business involves working from your computer at home, there may still be liability issues.

However, the exact type of insurance you need will depend on the kind of activities you carry out.

Professional indemnity insurance

Professional indemnity insurance covers you in the case of claims a client has suffered a financial loss due to your services. This is relevant to many knowledge workers, such as accountants or consultants.

Public liability insurance

Public liability insurance concerns your liability to the public, so you only need it if you have a public-facing business. For instance, shops and tradespeople.

When should I change from sole trader to limited company?

As your income or the complexity of your operations increase, you may consider transitioning from a sole trader to a limited company. 

Limited companies are taxed differently – directors typically receive a small salary and earn the rest of their earnings in dividends, meaning they pay Corporation Tax and tax on dividends rather than income tax. This becomes the better option once you enter a higher tax bracket, but an accountant can advise you on which business structure is the best for your specific situation.

When you want to make this switch, you’ll need to go through the steps of registering a company and let HMRC know that you’re stopping self-employment. You will then have to transfer any existing business assets. You can register as a limited company through ANNA. 

Following the rules as a sole trader

Here are some tips to help you stay on top of your ongoing responsibilities and keep everything ship shape. 

• Keep business and personal finances separate
• Keep all receipts and invoices
• Keep track of deadlines
• Use categories for expenses
• Set aside money for taxes

Ending self-employment

If you decide you no longer want to be self-employed, you’ll need to let HMRC know by filling out their “stopping self-employment” form online. You’ll then have to provide information such as the day you stopped self-employment and you’ll have to submit a final self assessment tax return.

Sole trader example

Let’s take the example of Aisha, a mobile nail technician who is registered as a sole trader. Let’s see how much tax and National Insurance she pays.

She earns £42,000 a year (before expenses are deducted).

And has the following business expenses:

• Nail supplies: £4,000
• Fuel for travel: £1,800
• Parking: £300
• Vehicle maintenance: £700
• Marketing: £500
• Public liability insurance: £500
• Professional indemnity insurance: £400
• Accountant: £800

This gives her total expenses of £8,500, which she can deduct from her turnover, resulting in annual profit of £33,500.

In the 2024/25 tax year, her taxes can be calculated as follows:

• Personal Allowance: £12,570
• Taxable Profit: £33,500 - £12,570 = £20,930
• Basic Rate Tax (20%): £20,930 * 0.20 = £4186
• Class 4 National Insurance (10%): £20,930 * 0.10 = £2093

So she’s paying £4196 in tax and is making £2093 in National Insurance Contributions.