Company Formation

Set up as a sole trader: what you need to know

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You are self-employed and you don't know if you have to set up as a sole trader or not? In this article you will learn everything about what a sole trader is, how to set up as a sole trader and what your responsabilities will be.

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Answer Adeosun
Sep 4, 22 · 6 min read
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Who is a sole trader: definition

A sole trader is an individual who is self-employed because he owns and runs his business by himself.

The advantage to this is that this individual is the owner of all the profits from his business after tax. However, he is also liable to bear all losses, debts, and loss of assets to debt collectors alone.

As a sole trader, you don’t have the luxury of taking sick or holiday pay when on time off even though you can decide what kind of work you want to do and when you want to do it.

A sole trader pays taxes through the Self-Assessment and rather than through PAYE if you are working under someone else.

Difference between a sole trader and self-employed…

Though they can be used interchangeably, you can be self-employed and not be a sole trader. While the sole traders’ businesses are seen as the same entity as the owners of the businesses, a self-employed person can either be a sole trader, be into a business partnership, or be a limited liability company. The bottom line is a self-employed individual can either do his business alone as a sole trader or in conjunction with other people while a sole trader does not have such luxury.

How to set up as a sole trader?

First, when should you set up as a sole trader? The answer is when you’ve earned more than £1000 within a year of being self-employed, you need to set up tax-free childcare and you need proof of self-employment, or when you want to qualify for the benefits accrued to persons under the voluntary Class 2 National Insurance scheme.

If you fall under any of the categories we’ve listed above, then you should set up as a sole trader. So, how do you go about it…

  1. The first step is that you need to check if you are a sole trader or not. 
  2. Once you know that you are a sole trader, to pay tax with the HM Revenues and Customs (HMRC), you need to register for a Self-Assessment. This can be done online through their website. You may need to apply for the National Insurance number if you don’t have one already. This number enables you to work. also, if you are into construction or you are a self-employed fisherman, you’ll need to register differently. Check the HMRC website for directions.
  3. Register for VAT if necessary. You’ll need to register your business for VAT if its VAT taxable turnover is more than £85,000.
  4. Choose the name you want to trade under. There are rules guiding the use of a name, some of which are that the name cannot be offensive and must be in use by someone else. In other words, your trade name must be unique.
  5. Optionally, you can register a trademark name if you do not want others to trade with your business name.
  6. Check what records you need to keep. For this, you need to follow:

    I. Choose an accounting method – could be traditional or cash basis. For the traditional method, you need to pay tax on sales you’ve invoiced even if you are yet to receive payment whereas the cash basis method allows you to only pay taxes on the monies you have received alone.

    II. Keep an account or record of all sales and income, business expenses, VAT records (if applicable), personal income, grants or loans, and or PAYE records if you employ other people to work with you. You must keep a record of all transactions like invoices of sales, till rolls and bank slips, goods receipts, and bank statements. This will help you document your profit or loss to file tax returns as well as proof to present to the HMRC if and when they ask for it.

    III. If you are using the traditional accounting method, in addition to the above, you should keep records of:

    a) The money you are owed or owing,
    b) Funds you take to use for yourself,
    c) Year-end bank balance,
    d) Value of stock and work in progress at the end of the year, and
    e) Your total investment in the business.

Please note that, whichever method of accounting you chose to use, employing the expertise and advice of an accountant might be wise, especially if you are not good with numbers. It could also save you a whole lot of stress and headache.

  1. Your records must be kept for at least 5 years after the 31st of January deadline for the relevant tax year because HMRC may ask for your records to be sure your tax filing is accurate at any time.
  2. NOTE – you must provide HMRC with estimated figures if your record has been destroyed, lost, or stolen, or provisional figures assuming the evidence of the record is not available yet, of which you must provide such when they become available.

Note that, sole traders do not need to be registered with Companies House, only with HMRC. Only Limited Companies and Limited Liability Partnerships are required to do so.

Your responsibilities as a sole trader

  1. Obtain permission from the local authority that is in charge of your trade. If you are a contractor or subcontractor, you need to be registered with the Construction Industry Scheme (CIS).
  2. Keep separate personal and business accounts. Set up a bank account that is separate from your personal account as this will be used for the proper transaction record of your business. It will also make tax filing very easy.
  3. If your business will employ people, consider registering a PAYE (pay-as-you-earn) payroll scheme. Also, draw up employment contracts, pension, and insurance schemes for your employee if necessary.
  4. It may be required or desirable to insure your business.


As a sole trader, you bear the sole responsibility of making sure all your ducks are in a row especially where your tax filing is concerned to avoid problems with HMRC or other government authorities.

How to register as a sole trader?

You just need to follow this guide:
HowTo step image

1. To start with, find out if you are really a sole trader or not, then apply to pay tax to the HMRC through Self-Assessment

Of course, you must have your National Insurance number before this or apply for one if you don’t already

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