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What are the legal requirements for sole traders?

June 1, 2022

Setting up your own small business can be exciting — but have you considered the legal requirements for becoming a sole trader?

In this article we’ll cover the legal obligations associated with being a sole trader, and what you’ll need to do to meet your obligations as a new business owner.

What is a sole trader?

A sole trader is a self-employed person where, in the eyes of HMRC, you're seen as a singular legal entity with your business. This contrasts limited companies, who are seen as a separate legal entity and, as a result, have limited liability for if the company comes into financial trouble.If you are earning over £1,000 per tax year as a sole trader from self-employed work in the UK, you must legally register with HMRC.

What are the legal and financial requirements to be a sole trader?

While, on the bright side, legislation for sole traders is less complex than other legal structures, there are still a few obligations you’ll need to take into consideration when getting started. You’ll be the only beneficiary of your business’s accomplishments, so you will also be solely responsible for keeping in line with the legal obligations and deadlines.There is definitely more personal risk involved as well as greater responsibility in making sure your business fulfils all the requirements, but if you are the only employee, administration is ultimately simpler.

Registering for Self Assessment

Income Tax

By midnight on 31st January, you are legally required to send a Self Assessment tax return to HMRC to update them on your yearly expenditures and income. You'll also need your UTR to pay your Self Assessment tax bill by the same deadline or you’ll be fined.You’ll only need to pay Income Tax on your taxable income, which can be worked out using the following:

Depending on how much you earn and where you live in the UK, you’ll be placed in a certain tax bracket which calculates the total amount of tax you owe. Regardless of where in the UK you reside, as a sole trader the first £12,570 you make is known as your Personal Allowance, and is not taxed.

England, Wales and Northern Ireland 2022/23 Tax Bands

Scotland 2022/23 Tax Bands

National Insurance

While Class 4 is automatically calculated and included in your taxes, Class 2 is calculated on a weekly basis.

Business name

As a sole trader, you don’t necessarily need to register business name, and can run your business under your own name if you wish. However, this doesn’t prevent other companies from using your business name as their own, so you want your business name to be unique you’ll need to trademark it.If you do choose to trademark your business name, you’ll need to make sure it complies with HMRC’s sensitive or offensive language requirements and doesn’t include any of the these phrases:●       ‘Ltd’●       ‘limited●       ‘LLP’●       ‘limited liability partnership’●        ‘plc’●       ‘public limited company’

Managing your earnings and expenses

As with all businesses, you must keep detailed records of your business’s earnings and expenses. Make sure to stay organised so you’re prepared for the end of the tax year with records of:Keeping detailed records is particularly important if there are any accounting errors as they will personally reflect on you.

Insurance

Vehicle insurance, if transportation is part of your businessPublic Liability Insurance, if your business has direct contact with customersEmployers’ Liability Insurance, if you hire employeesProfessional Indemnity Insurance, if your business’s mistakes could have damaging consequences for your clienteleBuilding and Contents InsuranceBusiness Assets and Equipment CoverGoods-in-Transit Insurance, if your business functions online and you regularly mail your products to customers

Hiring Employees as a Sole Trader

After registering with HMRC, your legal responsibilities as an employer include:

Set up Employers’ Liability InsuranceCreate a written employment contractCreate a written statement of employment particularsDecide on a salary that is above the National Minimum Wage

GDPR

As of May 2018, sole traders must keep the General Data Protection Regulations (GDPR) in mind when collecting data from their clients.You don’t need a designated protection officer - especially if you choose not to hire any employees - but you must keep records of your clients’ consent or risk being fined up to 4% of your annual income.These records must, by GDPR regulations, show how and when  you were granted explicit consent, for what purpose, and for how long their consent is considered valid.

What are the advantages and disadvantages of becoming a sole trader?

There are a lot of advantages that come with being a sole trader, such as:

Being your own boss, getting to choose the work you do and the hours you work.Total control over your business, where all creative and administrative decisions are yours alone.Keeping all profits after tax, especially if you choose not to hire any staff.Minimal paperwork, only needing to register for Self Assessment with HMRC and then continue keeping records.

However, no business structure is perfect. Running a sole trader business also comes with some drawbacks:

Final thoughts

Starting your own business in the UK can be just as daunting as it is exciting with all the necessary legal and financial requirements.If you choose to start this journey as a sole trader however, it simplifies the legal requirements to just a few steps so you can focus on your business.Just remember to keep detailed records for yourself and HMRC, and submit your tax returns on-time to avoid fines.