Registering as a Sole Trader: A Complete Guide

Starting your own business as a sole trader is one of the most accessible ways to become self-employed in the UK. This guide explains everything you need to know about becoming a sole trader, from registration to tax responsibilities, accounting requirements, business banking options, and selecting the right software tools for your business.

What is a sole trader?

A sole trader is simply someone who is self-employed and runs their own business as an individual. Despite the name, sole traders can hire employees – the term refers to the business structure rather than working alone.

As a sole trader, you and your business are considered the same legal entity. This setup is the simplest form of business structure available and remains popular among small business owners, freelancers, and those just starting their entrepreneurial journey.

One key aspect of being a sole trader is that you take on personal financial responsibility for your business. Any debts or liabilities your business incurs are your personal responsibility, and you must pay them even if your business fails.

For small businesses with minimal risk of building significant debts, this arrangement often works well. However, if your business model might lead to substantial financial obligations, you might want to consider forming a limited company instead, which separates your personal finances from your business.

Why become a sole trader?

People choose to register as sole traders for several practical reasons:

Quick and easy setup: Becoming a sole trader is straightforward with minimal paperwork and no registration fees. You simply need to inform HMRC that you’re self-employed.

Simple accounting requirements: The accounting processes for sole traders are less complex than those for limited companies. You won’t need formal annual accounts or a Corporation Tax return, though you still must maintain financial records and submit a self-assessment tax return.

Full control: As a sole trader, you make all the decisions. You don’t need to consult with directors or shareholders, giving you complete freedom to develop your business according to your vision.

Operational flexibility: You can adapt quickly to changing market conditions or customer needs without going through formal approval processes. This agility can be a significant advantage in competitive or rapidly evolving industries.

Low startup costs: Setting up as a sole trader typically requires minimal capital. While you might need funds for equipment or inventory depending on your business type, the legal formation itself doesn’t come with fees.

Privacy: Unlike limited companies, sole traders aren’t required to publish their financial information. This means your business finances remain private, potentially giving you a competitive advantage as rivals can’t easily see how your business is performing.

Profit retention: All profits from your business belong to you after tax, without needing to share with other shareholders or leave profits in the business.

Easier transition: If you’re starting a business part-time alongside employment, operating as a sole trader often feels less formal and may be easier to explain to your current employer than forming a limited company.

How to register as a sole trader

Registering as a sole trader with HM Revenue & Customs (HMRC) is mandatory and should be done as soon as possible after starting your business. Failing to register could result in a fine equal to 100% of the tax due, plus the tax itself.

This requirement applies even if you’re running your business part-time or casually. Many entrepreneurs start businesses alongside regular employment as they test their business idea or wait for it to generate sufficient income.

The registration process is straightforward:

1. Register online: The easiest way to register is through the HMRC Online Service.
2. Call HMRC: Alternatively, you can contact the ‘Newly Self-Employed Helpline’ on 0300 200 3504.
3. Complete a paper form: You can also complete the HMRC form ‘Register if you’re a self-employed sole trader,’ print it, and mail it to HMRC.

When registering, you’ll need to provide:

• Your name
• Date of birth
• Address
• Telephone number
• National Insurance number
• The business start date
• Business name and type
• Whether you’re a sole trader or working with a partner

After registration, you’ll pay income tax on your business profits through self-assessment. You must complete a self-assessment tax return each year that details your income and expenses.

You’ll also need to pay National Insurance contributions (NICs). If your annual profits exceed £12,570, you’ll pay Class 4 NICs at 6% on profits between £12,570 and £50,270, and 2% on annual profits above this figure.

It’s essential to keep detailed financial records and proof of all business expenses, as these will be necessary when completing your annual tax return.

If your business employs people, you must collect income tax and NICs from them and pay these to HMRC. You’ll also need to operate a PAYE (Pay As You Earn) payroll scheme and enroll eligible employees in a pension scheme with employer contributions.

If your VAT taxable turnover exceeds £90,000 annually, you must register for VAT, charge it to customers, and pay it to HMRC. VAT registration also allows you to reclaim the VAT you pay to suppliers.

Do I need to re-register as a sole trader if I’ve submitted a self assessment before?

If you’ve been registered as a sole trader in the past but didn’t complete a self assessment for the previous tax year, you need to re-register with HMRC using form CWF1.

For this process, you’ll need your ten-digit Unique Taxpayer Reference (UTR). You can find your UTR on:

• Previous tax returns
• Your online HMRC account
• Other HMRC documents
• By calling the self assessment helpline at 0300 200 3310

Many self-employed individuals who take breaks from business activity need to go through this re-registration process when they resume their sole trader status.

Sole Trader advantages

Complete control

As a sole trader, you have full control over your business. You are genuinely your own boss without needing to consult other directors or shareholders. This independence allows you to develop your business exactly as you choose without compromising your vision.

Quick decision making

The ability to make decisions independently means you can adapt rapidly to changing circumstances. You can modify your pricing structure or product offerings without delay. This swift decision-making capability can give you an edge in competitive, fast-changing markets.

Customer connection

Sole traders typically work closely with their customers, allowing them to understand and respond to client needs quickly. Some customers, particularly those seeking personal services, may prefer working with a sole trader rather than a limited company that might seem too “corporate” or impersonal.

Low setup and running costs

Setting up as a sole trader involves minimal costs compared to forming a limited company. There are no Companies House registration fees, and you’ll likely need less professional advice during setup. Accounting costs are also typically lower due to simpler financial reporting requirements.

Fewer statutory obligations

Sole traders face fewer regulatory filing responsibilities than limited companies. There’s no need to file a confirmation statement or many other Companies House forms. This means less paperwork and fewer interactions with regulatory bodies.

Tax allowances on business assets

You may claim capital allowances (a form of tax relief) on purchases of equipment needed for your business. This can include computers, tools, vehicles, and office furniture. Other business expenses may also qualify for tax relief.

Business privacy

While limited companies must publish their accounts, a sole trader’s financial information remains private. This privacy can be advantageous as competitors have less insight into your business performance and strategies.

Simplified change of direction

If you start as a sole trader and later decide the business isn’t viable, winding down is simpler than closing a limited company. Conversely, if your business succeeds, you can always convert to a limited company later.

Disadvantages of a Sole Trader

Personal liability

The most significant drawback of being a sole trader is unlimited personal liability. Your business is not a separate legal entity, so all its debts and liabilities are your personal responsibility. If your business fails with outstanding debts, creditors can claim your personal assets, including your home, and you could face bankruptcy.

Perceived lack of professionalism

Fairly or unfairly, sole traders sometimes face perception issues. Some clients and suppliers view sole traders as smaller, less established, and less professional than limited companies. This perception might affect your ability to win certain contracts or secure favorable credit terms.

Client restrictions

Some clients, particularly larger organizations and public sector bodies, have policies against working with sole traders. This limitation can significantly restrict your potential customer base in certain industries. Before establishing your business, research whether your target customers typically work with sole traders.

Limited tax planning options

Sole traders generally have fewer tax planning opportunities than limited company directors. All profits are subject to income tax in the year they’re earned, regardless of whether you withdraw the money from the business. In contrast, limited company directors can time dividend payments strategically to minimize tax liability.

When a sole trader’s business becomes highly profitable, they typically pay more tax than they would through a limited company structure. Limited company owners can draw dividends taxed at lower rates than income, potentially resulting in higher take-home pay.

Restricted access to finance

Securing funding can be challenging for sole traders. Banks often prefer the greater financial transparency of limited companies and may offer less favorable loan terms to sole traders. Additionally, sole traders cannot issue shares or securities to attract investment, and some government funding schemes exclude sole traders.

Isolation in decision making

As a sole trader, you make all key decisions alone. This responsibility can feel isolating, especially when facing difficult choices. While you maintain complete control, you miss the benefit of collaborative thinking and shared responsibility that partnerships or limited companies offer.

Business continuity challenges

A sole trader business typically depends entirely on one person. This dependence creates problems during illness, vacation, or when the owner wants to retire or sell the business. Without proper planning, a sole trader business has limited value apart from its physical assets, as much of its worth lies in the owner’s skills and customer relationships.

Work-life balance difficulties

For sole traders who work alone, everything depends on you. Taking time off for holidays or illness can be difficult without disappointing clients or losing income. Many sole traders work long hours to build their business, which can negatively impact family life and personal wellbeing.

Do you need a separate bank account as a sole trader?

While no law requires sole traders to open a separate bank account for business, doing so offers significant practical benefits. A dedicated business account creates a clear line between your personal finances and business transactions.

This separation makes financial management much simpler, especially when:

• Tracking business income and expenses
• Preparing your self-assessment tax return
• Managing cash flow
• Demonstrating your income for loans or mortgages

Many personal bank accounts have terms that prohibit business transactions. Using a personal account for business could potentially violate your banking agreement.

A business account also projects professionalism when clients pay you. Receiving payments into an account with your business name looks more established than payments to a personal account.

Most business accounts now offer features designed specifically for sole traders, such as integration with accounting software, receipt capture, and business expense categorization.

Top Business Bank Accounts for Sole Traders

For sole traders, a dedicated business bank account isn’t a legal requirement (unlike limited companies), but it substantially improves financial organization. A separate account creates a clear division between personal and business finances, simplifies tax reporting, and enhances your professional image with clients.

Zempler Bank

Zempler Bank (previously known as Cashplus) delivers sole traders a no-nonsense business bank account with zero monthly charges on their entry-level option. With FSCS safeguards up to £85,000, this account includes revenue monitoring, accounting connections, and real-time transaction alerts. Most applicants can open an account rapidly without extensive credit checks, making it ideal for startups. Zempler works particularly well for UK-focused sole traders who don’t need significant international transfer capabilities.

Tide Business Account

Tide offers a zero-fee business bank account that’s gained popularity among freelancers and self-employed individuals. Supporting more than a million businesses worldwide, Tide provides tools for invoice generation, expense management, accounting software integration, and administrative functions. Account holders benefit from FSCS security via Tide’s ClearBank partnership. Their usage-based pricing structure means you’re only charged small fees when making transactions, with premium plans available for additional functionality when your venture expands.

ANNA Money Business Account

ANNA (which stands for Absolutely No Nonsense Admin) provides a business bank account specifically created for sole traders and micro-businesses. The service focuses on reducing everyday paperwork by combining payment processing, receipt organization, and tax submission in a single interface. ANNA delivers round-the-clock assistance with prompt responses through its messaging system. While the standard plan has no recurring fees, you’ll pay modest transaction charges when using services. Be aware that ANNA operates as a financial technology provider rather than a bank, so accounts lack FSCS protection.

Countingup Business Account

Countingup presents a distinctive hybrid of business bank account and bookkeeping software tailored for sole traders. The platform features automated accounting, tax calculations, and continuous financial insights. Subscription costs vary based on monthly deposits, beginning at £3 monthly for smaller transaction volumes, and new users receive a three-month complimentary period. Countingup enables unlimited professional invoice creation, payment tracking, and direct sharing of financial data with your accountant.

Revolut Business Account

Revolut Business stands out for sole traders who work internationally. Its accounts offer multi-currency support, allowing you to hold, send, and receive money in over 25 currencies with competitive exchange rates. The Basic plan (£10/month) includes limited free transfers, while paid plans offer more free transactions and additional features. Revolut offers strong expense management tools and integrates with accounting software, but note that it’s not yet a fully licensed bank in the UK, so doesn’t offer FSCS protection.

When selecting a business bank account, evaluate these key factors:

• Fee structure (monthly subscriptions and per-transaction costs)
• Compatibility with bookkeeping software
• Smartphone application usability
• Physical cash deposit options
• Financial protection status
• Support availability
• Cross-border payment features
• Supplementary tools (invoice generation, receipt capturing, tax assistance)

Remember that your banking requirements will evolve as your business develops, so select an account with adaptability and room for growth.

Best Sole Trader accounting software compared

Good accounting software saves time, reduces errors, and helps ensure tax compliance. Here’s a comparison of the top options for sole traders:

QuickBooks

Price: From £10/month (often discounted for the first 6-12 months)
Who is it for?: Sole traders to large businesses
MTD-recognized?: Yes (Simple Start plan and above)

QuickBooks is one of the earliest cloud-based accounting software providers. For sole traders, even the basic plan helps with Self Assessment preparation and invoicing. As your business grows, higher-tier plans add features like VAT submission to HMRC and deadline reminders. The platform is customizable and includes an introductory guide.

FreeAgent

Price: Free with certain bank accounts; from £19/month for sole traders; from £10/month for landlords (Often discounted + 10% Off Lifetime with my special coupon code: 4ip82cra)
Who is it for?: Sole traders, small businesses, landlords, accountants
MTD-recognized?: Yes

FreeAgent targets freelancers and small businesses, focusing on daily tasks like invoicing, time tracking, and expense management. Its mobile app lets you handle bookkeeping on the go, including receipt photo uploads. Optional add-ons include Amazon account integration. FreeAgent is free if you bank with NatWest, Mettle, Royal Bank of Scotland, or Ulster Bank.

Xero

Price: From £16/month (often heavily discounted initially)
Who is it for?: Sole traders to large businesses
MTD-recognized?: Yes

Xero is a comprehensive cloud accounting solution that handles invoicing, inventory, payroll, and expense claims. It imports data from banks, credit cards, and PayPal, with an app for both iPhone and Android. Certain packages support MTD VAT submission to HMRC. Plans can add users as your business grows.

FreshBooks

Price: From £7.50/month (often discounted)
Who is it for?: Sole traders and small businesses
MTD-recognized?: Yes

FreshBooks is known for its user-friendly interface and clear, jargon-free approach. Designed for freelancers and small businesses with basic accounting needs, it focuses on invoicing and expense tracking. It integrates with PayPal, Zendesk, and other apps. A free trial is available, and all packages support MTD compliance with direct HMRC submission.

Sage

Price: Get 3 months free; From £15/month
Who is it for?: Sole traders to large businesses
MTD-recognized?: Yes (paid version)

Sage is a major enterprise software provider with cloud accounting options for small businesses. Sage Business Cloud Accounting helps with invoicing, cash flow, and payroll. As your business grows, you can add Sage HR or Payroll. For sole traders just starting out, Sage Accounting Individual Free offers basic income and expense management, receipt recording, and income tax summaries via a free mobile app, though this version isn’t MTD-compatible.

Zoho Books

Price: Free basic version; paid plans from £12/month
Who is it for?: Sole traders and small businesses
MTD-recognized?: In development

Zoho Books integrates with other Zoho apps and third-party tools. It supports invoicing, expense tracking, and inventory management. While it lacks UK payroll features, it connects to bank accounts for real-time cash flow updates. According to the government website, MTD compatibility is in development.

Online Accountant – From Only £22.50 a Month

The Accountancy Partnership delivers comprehensive online accountancy services across the UK for a transparent, set monthly fee. Their all-inclusive package assigns you a dedicated accountant who handles your financial statements and tax submissions while offering unlimited support through multiple communication channels. The service features user-friendly online accounting software, automatic deadline notifications, and annual tax efficiency assessments designed to minimize your tax liability. Additional benefits include HMRC investigation representation, proactive bookkeeping verification, website and marketing evaluation, and access to business resources and a mobile application for invoicing and mileage tracking. This complete solution provides sole traders and small businesses with professional accounting expertise without the unpredictable costs typically associated with traditional accounting services.

How much tax does a sole trader pay?

As a sole trader, you pay tax on your business profits after deducting allowable expenses and any capital allowances. The self assessment tax return is where you detail all your income and expenses.

The basic personal allowance (tax-free income) is £12,570. This allowance decreases when your income exceeds £100,000.

Income tax rates fall into three bands:

Taxable income (£)	Tax rate
£0 – 37,700	20%
£37,701 – 125,140	40%
Over £125,141	45%

National Insurance Contributions (NICs) also apply based on your profits and are collected through self assessment alongside income tax. You pay Class 4 NICs at 6% on profits between £12,570 and £50,270, with an additional 2% on profits above £50,270.

You’re exempt from NICs if you’re under 16 or over the state pension age.

Do sole traders pay VAT?

Yes, sole traders pay VAT on goods, services, and materials purchased for their business.

You must register for VAT when your turnover exceeds the registration threshold (currently £90,000) for the previous 12-month period or will exceed this threshold in the next 30 days.

Some sole traders choose to register for VAT voluntarily even with turnover below the threshold, for these reasons:

• The ability to reclaim input VAT (tax paid on purchases) if it exceeds the VAT charged to customers
• Added business credibility by appearing more established

However, VAT registration comes with considerations:

• You must either add VAT to your prices or absorb it yourself (reducing profit margins)
• Additional administrative work is required including VAT record-keeping, issuing VAT invoices, and filing VAT returns
• You must pay the difference between VAT collected and VAT paid on purchases to HMRC

What tax records must sole traders keep?

Sole traders need to maintain records of:

• All sales and income
• Business expenses
• VAT records (if VAT-registered)
• Personal income details
• Support grants received
• Bank statements

Most sole traders now use accounting software for record-keeping, which simplifies self assessment filing.

You must preserve these records for five years after the relevant tax year ends, as HMRC may investigate your tax returns during this period.

What expenses can sole traders claim?

Generally, any cost incurred wholly for business purposes qualifies as an allowable expense. This includes:

• Phone and internet costs
• Marketing and advertising
• Materials and supplies
• Tools and equipment
• Inventory and stock
• Business premises costs
• Utilities
• Travel expenses
• Professional fees
• Insurance

Claiming legitimate business expenses reduces your taxable profit, lowering your overall tax bill.

Sole trader insurance requirements

Insurance needs for sole traders vary significantly depending on your specific business type, industry, and activities. Different trades face different risks that require specific coverage.

Legally required insurance:

• Motor insurance (at least third-party) for any vehicle used for business purposes
• Employers’ liability insurance if you hire staff, protecting against claims from employees who suffer illness or injury through work
• Professional indemnity insurance if you operate in legal, accountancy, or financial service sectors

Industry-specific requirements:

• Tradespeople (plumbers, electricians, builders) typically need public liability and tools insurance
• IT consultants and business advisors benefit from professional indemnity coverage
• Retail sole traders need shop insurance and product liability protection
• Home-based businesses may need specific home business insurance as standard home policies often exclude business activities
• Therapists and healthcare practitioners require specialized treatment liability insurance
• Food businesses need specific food safety and hygiene coverage

Recommended protection:

• Public liability insurance covers claims from clients or members of the public for injury or property damage caused by your business
• Business contents insurance protects your equipment, tools, inventory and premises
• Business interruption insurance provides income if you cannot operate due to events like floods, fires, or theft
• Income protection insurance offers financial support if illness or injury prevents you from working
• Professional indemnity insurance (even when not mandated) protects against claims of negligence or mistakes in your professional services

The right insurance package depends on factors like:

• Your daily business activities and the risks they involve
• Whether customers visit your premises
• The value of your business equipment and tools
• If you provide advice or services that clients rely on
• Industry-specific regulations and client requirements

Many insurers offer tailored packages for specific trade types that combine relevant coverages at competitive rates. It’s worth shopping around and consulting with an insurance broker who specializes in business insurance for your particular industry.

Conclusion

Registering as a sole trader offers a quick, simple way to start a business with minimal paperwork and costs. This business structure provides complete control and flexibility but comes with significant personal financial risk and potential limitations as your business grows.

Before making your decision, carefully weigh the advantages against the disadvantages based on your specific business needs, growth plans, and risk tolerance. Consider consulting with an accountant who can advise on the best structure for your particular situation.

If you do choose to become a sole trader, make sure you register with HMRC promptly, maintain good financial records, and consider investing in proper accounting software to help manage your business finances efficiently.

Remember that your business structure isn’t permanent – many successful businesses start as sole traders and later convert to limited companies as they grow and their needs change. The key is to choose the option that best supports your current situation while allowing for future growth.

Not sure whether to register as a sole trader or form a limited company?
After understanding how to register as a sole trader in this guide, you might be wondering about your other options. For entrepreneurs looking for greater personal liability protection and a more formal business structure, check out our companion article “How to Open a Limited Company in the UK: A Step-by-Step Guide” where we walk you through the process of company incorporation, explaining the different requirements, benefits, and obligations compared to sole trader status.