How to Set Up as a Sole Trader in the UK
Becoming a sole trader is the simplest way to start trading in the UK. There is no formal registration with Companies House — you simply notify HMRC and start keeping records. But simplicity does not mean there are no obligations. This guide explains exactly what you need to do to set up correctly and stay compliant.
What Is a Sole Trader?
A sole trader is an individual who runs their business as themselves rather than through a separate legal entity. You and your business are legally the same — you personally own all assets and are personally liable for all debts. This is in contrast to a limited company, where the business is a separate legal entity and liability is (in most cases) limited to what you have invested.
Step 1: Tell HMRC You Are Self-Employed
Register for Self-Assessment at gov.uk/register-for-self-assessment. Do this by 5 October following the end of the first tax year in which you had self-employment income. So if you started trading in December 2024, register by 5 October 2025. You will receive a Unique Taxpayer Reference (UTR) by post within 10 working days. You will also need to activate your online tax account at gov.uk/personal-tax-account.
Step 2: Register for NI if Applicable
From April 2024, Class 2 National Insurance was abolished. Self-employed people earning profits above the Small Profits Threshold (£6,725 in 2025/26) automatically accrue State Pension Qualifying Years through paying Class 4 NI via Self-Assessment. If your profits are below this threshold, consider voluntary Class 3 NI contributions.
Step 3: Choose a Business Name
As a sole trader you can trade under your own name or choose a business name. If you use a business name, you must include your own name and address on business stationery and invoices. You cannot use a name that is offensive, suggests a connection with the government, or is already trademarked.
Step 4: Open a Business Bank Account
Although not legally required for sole traders, a separate business bank account makes record-keeping significantly easier. It separates business income and expenditure from personal finances, which HMRC will appreciate if they ever review your records.
Step 5: Keep Records
You must keep records of all business income and expenses. Store receipts, invoices, bank statements, and mileage logs. HMRC requires records to be kept for at least 5 years after the 31 January submission deadline. From April 2026 (if your income is over £50,000), digital records will be required under MTD for Income Tax.
Step 6: Register for VAT if Necessary
If your turnover exceeds £90,000 in any rolling 12-month period, you must register for VAT. You can also register voluntarily below this threshold if it is commercially advantageous.
Step 7: File Your Self-Assessment
Each year you must complete a Self-Assessment tax return, reporting your business income and expenses. The online deadline is 31 January. You will pay income tax on your profits and Class 4 NI. If your total tax and NI bill exceeds £1,000, HMRC will require Payments on Account — advance payments in January and July.
Insurance
Consider public liability insurance (essential if clients visit your premises or you visit theirs), professional indemnity insurance (for advice-based businesses), and income protection insurance (to cover you if ill, as sole traders have no sick pay entitlement).
Should You Stay a Sole Trader or Form a Limited Company?
Sole trader status is simpler and cheaper to administer. Once profits exceed roughly £30,000–£40,000, a limited company may become more tax-efficient — but the administrative obligations increase significantly. This is a decision best taken with an accountant.
