How to Start a Sole Trader Business in UK

7 steps to set up your business as a sole trader

These steps will ensure you are compliant and correctly set up with the UK government

1. Decide if being a sole trader is the right set up for you

76% of businesses in the UK are sole traders and this is how many people setup. Advantages to being a sole trader include; keeping things simple in terms of administration, you can employ people and it’s a relatively straight forward process with HRMC. However, there are also draw backs; you will be personally liable for any debts the business incurs and will have limited access to external finance options. If you are just starting out and are setting up a low-cost business becoming a sole trader is a great option.

2. Register with HRMC

Once you have decided you are going to operate as a sole trader you will need to let HRMC know by registering for a self-assessment tax. HRMC will then send you a letter with your 10 digital Unique Taxpayer Reference (UTR) which will allow you to go online and set up your account.

If you have done a tax return online before grab you UTR (unique taxpayer reference) and fill out this form – CWF1. If you’ve forgotten your UTR find it here.

If you have a business that you run alongside being employed by another company it is still worth looking into whether you should register. The Gov website has a test page here. Alternatively speak to an accountant for advice, more on that later.

3. What to do if you employ someone as a sole trader

A common misconception of being a sole trader is that you can’t employ people however as long as you have the correct set up you can. You will need to pay income tax and National Insurance contributions for each employee so will need to set up a PAYE. You will need to pay income tax and National Insurance contributions for each employee so will need to set up a PAYE. This government resource is a good directory for what you will need to cover if you have employees, it also takes you to details regarding your tax self assessment form – get bookmarking!

In terms of employment law – know your basics. A great site for basic legal documents is Rocket Lawyer.

ACAS is a goldmine of informative articles on everything from employment law to workplace Covid advice.

If you’re looking to contact a solicitor our accredited partners, Thursfields have the experience and legal expertise to guide you throughout the life cycle of your business. Read more here.

4. Get an accountant

You can do your books yourself however unless you particularly enjoy this aspect of running your business getting an accountant is not only a good idea, it’s essential. When you are just starting out and trying to keep costs low it may seem like an unnecessary outgoing however if you make a mistake, file something incorrectly or just miss something from HRMC having an accountant is a life saver. Ask friends, fellow business owners and find out more about our accredited accounting partner, Stewart Associates, here.

Remember to keep organised and maintain detailed financial records of everything to do with your business. It may be boring and the last thing you want to do at the end of a busy day but future you (and your accountant!) will love you for doing it. Download accounting software to your phone to keep organised even on the go – Xero, QuickBooks and Sage are all popular and user friendly solutions.

5. Do you need to register for VAT?

If your businesses turnover exceeds £85,000 per annum you have to be VAT registered – register here. If you are under this threshold registering is an extra process however it does mean you can claim VAT back on goods and services you use for your business. Don’t forget to keep those receipts!

6. Understand your tax

This is where the accountant will come in useful however a good rule of thumb is put aside 25% of your income. Don’t touch this until the end of the financial year (sole traders need to pay their tax for the previous year by the 31st January every year) and you should be golden. Alongside your income tax you will have to pay National Insurance Contributions throughout the year. Here are the thresholds

Annual profits below £9,568 (2021/22) = £3.05 per week.

Annual profits between £9,568 and £50,270 = 9%

Annual profits over £50,270 = 2%

7. What insurance do you need?

There are legal requirements for insurance but this decision is also influenced by the type of business you have and how much ‘peace of mind’ you want to pay for. We’ve outlined a few basic forms of insurance below to get you started.

Employers Liability Insurance – this is the only legally required form of insurance for a small business owner. This is to cover any employees that are injured whilst working for you. If you operate with no insurance and have staff working for you, there can be a penalty of £2,500 per day.

Management Liability Insurance (Directors’ and Officers’ Liability Insurance) – this covers the individual directors personally rather than the business as a whole. This can be helpful if things do go wrong as directors are open to having claims of malpractice brought against them with potential fines, disqualification (this will mean you won’t be able to be a director of a future company) and even prison sentences. When taking out this insurance check your policy covers insolvency and large shareholders (over 15%) as many policies do not protect you in these cases.

Public Liability Insurance – this is to cover customer injury. Accidents do happen and not having this insurance if you have a shop/salon etc could be costly. Also note some clients and suppliers may request you have this insurance as part of your contract with them.

Contents and Portable Equipment Insurance – this covers all the technology and physical belongings you use to operate your business. If you are running your business from home and have contents insurance it’s worth checking the wording of your policy as some do not cover equipment used in a commercial capacity.

Professional Indemnity Insurance – this is for businesses that offer advice or consultancy services. This insurance will cover you if a client of yours makes a claim against you stating they have incurred financial loss after acting on your advice. In these industries clients may insist you have this form of insurance and it will help bolster your professional reputation if you do.

Cyber insurance – this will insure you against any claims made if you have a data breach. You should consider this insurance if you hold large amounts of customers data and/or sensitive customer data. This may become more important as you grow and will be valuable to have as you build the data on your customers to optimise your marketing strategy and potentially increase your product/service offering.

If you follow these steps you will have a compliant and solid foundation from which to grow your business. If you’re still unsure, we’ve outlined the main differences between being a sole trader vs limited company for you. Alternatively if you’ve decided forming a limited company is the best option for you read our checklist on how to set up a limited company.