How to Start a Business (Sole Trader)

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

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.

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.

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!

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.

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!

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

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.

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.