Starting a business as a sole trader

Starting Business as a Sole Trader: A Complete Guide

When starting business as a sole trader in the UK, there are important decisions and obligations to consider.

This business structure is one of the simplest ways to begin trading, but it still comes with responsibilities around tax, registration, and compliance.

Understanding the rules at the outset can save time, money, and stress later.

Why Choose Sole Trader Status?

Operating as a sole trader means you are in business for yourself.

Unlike forming a company or partnership, this option is simple and flexible.

However, it does mean that you are personally responsible for your business finances, including any debts.

Registering with HMRC

If you are starting business as a sole trader, you must register with HMRC for Self Assessment once your annual trading income reaches £1,000 or more.

  • If you already file a Self Assessment tax return (for rental or investment income, for example), you don’t need to register again. Instead, you’ll complete the self-employment pages in your return.

  • New sole traders must register by 5 October following the end of the tax year in which they became liable. For instance, if you start trading in 2024/25 and earn more than £1,000, you must register no later than 5 October 2025.

  • Registration is done online via the Gov.uk website.

Tax and National Insurance

As a sole trader, your profits are subject to income tax:

  • Personal allowance: £12,570 (2024/25 and 2025/26).

  • Tax rates:

    • 20% on taxable income up to £37,700.

    • 40% on income between £37,701 and £125,140.

    • 45% on income above £125,140.

If your income exceeds £100,000, your personal allowance is gradually reduced, disappearing entirely once income surpasses £125,140.

You’ll also pay National Insurance (NI):

  • Class 4 NI: 6% on profits between £12,570 and £50,270; 2% on profits above £50,270.

  • Class 2 NI: If profits exceed the small profits threshold (£6,725 in 2024/25 and £6,845 in 2025/26), you automatically receive NI credits toward your state pension. If profits fall below this, you can make voluntary contributions (£3.45 per week in 2024/25; £3.50 in 2025/26).

Both income tax and NI are payable by 31 January following the end of the tax year.

VAT Requirements

When starting business as a sole trader, you must monitor your turnover for VAT purposes. Registration is mandatory if:

  • Your VATable turnover exceeds £90,000 in the previous 12 months, or

  • You expect it to exceed £90,000 in the next 30 days.

Record Keeping

Keeping accurate records is essential:

  • Separate business and personal bank accounts.

  • Keep invoices, receipts, and expense records.

  • Use digital accounting software to prepare for Making Tax Digital (MTD).

How Trueman Brown Chartered Accountants Can Help

The process of starting business as a sole trader can be overwhelming without guidance.

Trueman Brown Chartered Accountants provide expert support, ensuring you remain compliant while maximising efficiency:

  • Tax compliance: Accurately reporting income and expenses in line with HMRC rules.

  • Deadline management: Avoiding penalties by staying on top of filing dates.

  • Tax efficiency: Identifying allowable deductions and reliefs to reduce your tax liability.

With professional support, you can focus on growing your business while knowing your tax affairs are in safe hands.

FAQ: Starting Business as a Sole Trader

1. Do I need to register immediately after starting?
No. You must register with HMRC by 5 October following the end of the tax year in which you first earned over £1,000.

2. Can I be employed and a sole trader at the same time?
Yes. Many people run a side business while employed, but you still need to report business income separately via Self Assessment.

3. What’s the difference between Class 2 and Class 4 NI?
Class 2 contributions build your state pension record, while Class 4 contributions are based on profits and payable with your tax bill.

4. Do I need a separate bank account as a sole trader?
It’s not a legal requirement, but strongly recommended for clearer record-keeping.

5. When do I need to register for VAT?
Once your VATable turnover exceeds £90,000 in a 12-month period or you expect to exceed it in the next 30 days.

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