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Getting started as a sole trader: all you need to know

October 26, 2021
Whether you're monetising a hobby, starting a side hustle or bringing a business idea to life for the first time, setting up a sole trader business is both a thrilling and terrifying experience for any entrepreneur.However, before taking the plunge into the world of self-employment, it's a good idea to brush up on what it means to be your own boss. As an employee, your employer would have handled all the gritty business admin tasks, but as the boss of your own small company the buck stops with you.This isn't a cause for panic. While getting to grips with business owner responsibilities while actually running a business might seem like a tall order, once you know the basics you'll find the rest comes naturally.We'll be covering all you need to know about starting out as a sole trader, from registering your company name to keeping on top of your business owner obligations. Continue reading this page or use the links below to jump to a specific section.

How to register as a sole trader

Before diving into the obligations you have as a new business owner, you'll need to register as a sole trader with HM Revenue and Customs (HMRC) via the gov.uk website.

In the eyes of the UK government, any small business earning over £1000 in a tax year must register as a business, or otherwise face hefty fines, additional penalties and a whole lot of legal trouble.Fortunately, setting up as a sole trader is quite simple. After you've read our step-by-step guide on setting up as a sole trader, simply fill out HMRC's online form and get ready to start your next chapter as a sole trader.

Choosing a business structure

It's worth noting that sole traders with large taxable turnovers may find it more tax efficient to register as a limited company. This is all down to the different tax bands applicable to each business structure — while limited companies pay a Corporation Tax rate of 19% on all profits, sole traders can pay up to 45% in Income Tax on theirs. To see whether it's more tax efficient to register as a sole trader or limited company, you can use our calculator here.

Business banks for sole traders

If operating as a sole trader proves to be the most profitable, the next step to getting started as a sole trader is to pick the right business bank for you. While you can use your personal bank account for business purposes as a sole trader, you might find there are benefits to opening up a business bank account.

By opening a business bank account with Tide through Ember, we'll get you started by slotting £50 into your account. To find out more about opening a business bank with Tide, head over to our partnerships page.

Selecting a business name

When envisioning your dream company, one of the first things you probably thought about was what you would call your shiny new business. However, before you can successfully register your business, you'll need to make sure that your chosen sole trader name gets a big tick from HMRC first.

First and foremost, as a sole trader you don't necessarily need to pick a business name, and can operate under your own name. However, if you want to stand out to potential customers, coming up with the right name can set the tone for your brand and attract more business.If you do choose to create your own business name, sole trader names cannot:
    Include "limited", "Ltd", "limited liability partnership", "LLP", "public limited company" or "plc"Be offensiveContain the name of an existing trademarkContain a 'sensitive' word without prior permission from relevant authorities

Do I need to apply for business insurance?

Regardless of the work you do, getting business insurance as a sole trader is always a good idea. However, knowing exactly which business insurance to get is entirely dependent on the nature of the work that you do, the equipment you use and how you run your business.

The first thing to consider when taking out business insurance is whether or not taking out insurance is a legal requirement for your business. Depending on the nature of the work you do, you might find that you cannot operate legally unless you have the insurance in place — for example, as a driving instructor, you really need to make sure you have car insurance.

Once you've covered your bases on the legal front, the next step is to consider the potential risks that could arise in your line of work and see if there is an insurance out there that could cover you.
While it might not seem ideal to every small business owner, especially those that are just starting up and are limited in the amount of cash they have, getting the right insurance sorted not only offers a financial safety net, but offers both you and your customers peace of mind. For instance, freelancers hired by large corporates and local authorities are expected to be covered by professional indemnity and public liability insurance.

Unlike limited companies, the government sees sole traders and their businesses as a single entity, meaning that if things go wrong their personal assets are at stake. With this in mind, it's best to map out the potential worst-case-scenario and see what you can do to cover yourself should disaster strike — sometimes it pays to be pessimistic.

What taxes do I need to pay as a sole trader?

It goes without saying that paying the correct amount of tax before the deadline will keep you in HMRC's good books, but knowing exactly what to pay and when to pay tends to trip a lot of new business owners up. Not keeping on top of your taxes can result fines and other complications that can do some damage to a company's cash flow.

Sole traders earning over £1000 in a tax year must register for and pay Income Tax and, depending on the tax bracket they fall into, either pay Class 2 National Insurance or Class 4 National Insurance contributions (NICs). For businesses with a taxable turnover of more than £85,000, they will also need to register for VAT.

How do I pay tax as a sole trader?

As an employee you would have paid your taxes through Pay As You Earn (PAYE), but as the captain of your own ship you'll now instead be paying your taxes through a Self Assessment tax return.

To pay your National Insurance, you'll need to make sure you have your National Insurance number ready when you register for Self Assessment. If don't already have a National Insurance number, you'll need to apply for one at gov.uk.

For a complete breakdown of how to file your Self Assessment tax return as a sole trader, head over to our guide 'Self Assessment: A Definitive Guide for Sole Traders.'

When submitting your Self Assessment tax return, you'll need to detail all the capital allowances you've accumulated over the year to build an accurate picture of what your taxable profit looks like. From this, HMRC will calculate the total amount of tax you need to pay before the deadline.

Accrual vs. cash basis accounting

The first step is to settle on the method of accounting you'll be using. It might not seem significant at first, but certain tax deductions can be affected by whether or not you use accrual (traditional) accounting or cash basis accounting. To find out which of these accounting methods is better for your business, check out our guide on the differences between traditional accounting and cash basis.

Keeping your financial records

To make sure you're paying the right amount of tax, it's important to be on top of your record-keeping game. Meticulously recording every transaction you make not only keeps you out of trouble with HMRC, but can also make sure you're not missing out on any tax deductions that you're entitled to.
To be as accurate as possible in your record-keeping, we recommend getting to grips with the different ways your expenses can be categorised. Knowing whether a business expenditure classifies as an capital allowance can be useful when claiming tax deductions, and clearly defining the difference between a personal expense and a business expense instantly reduces the risk of making a mistake on your tax return. To get started, here's an overview of the different deductions you can make as a sole trader.

Making Tax Digital (MTD)

If you're a business owner earning a taxable profit over the VAT threshold, you'd have been using Making Tax Digital to pay your VAT since 2019. However, in 2024 MTD extends to businesses and landlords earning above £10,000 in a tax year to pay their Income Tax Self Assessment (ITSA). Through this scheme, businesses that qualify for MTD will need to keep digital records and use MTD-ready accounting software to update HMRC quarterly.

Tax relief for sole traders

While you do now have to manage the tax you pay on the money you make, the good news is that there are tax breaks out there for self-employed people.Before you head over to HMRC, however, it's a good idea to establish what exactly you're entitled to and how to claim it.

Simplified expenses

If you don't have the time to calculate your business expenses, HMRC offers sole traders the option to calculate their costs through simplified expenses. While applicable to only a handful of tax deductions available, such as tax relief when working from home, HMRC allows business owners to use a flat rate instead of figuring out their actual business costs.

Knowing the rules can mean the difference between saving on your tax expenses and facing fines and penalties from HMRC. If you're not sure, don't chance it — reach out to one of our qualified accountants for help.


There's a lot to wrap your head around when starting out, but getting to grips with the basics at the beginning will save you a lot of time and money in the long run. With Ember, you can get all the tools you need to get your business set up for success, with a choice to upgrade to get round-the-clock qualified accountant support.