Setting up as a sole trader

Running your own business as a sole trader means you’re self-employed, so you’ll be responsible for looking after your own tax and National Insurance. You are responsible for running your business and meeting the legal requirements that are applicable to you - in your business administration and insurance; in hiring, paying and managing staff; and in all your business operations.

You are also responsible for filling in your self-assessment tax return and paying all of the National Insurance and Income Tax that you are due.

Your responsibilities include:

• Registering with HMRC as soon as you start trading, and completing a Self Assessment tax return on time each year if applicable, or sending your Making Tax Digital updates and submitting your tax return.

• Keeping accurate business records - depending on your accounting basis - and accurate records of allowable expenses.

• Signing up for Making Tax Digital if that applies to your business and using tax compatible software, create and store digital records, send quarterly updates to HMRC and submitting your annual return.

• Ensuring you pay any income tax due on your profits and also pay Class 2 and Class 4 National Insurance

• Registering as an employer with HMRC if you bring on staff (before their first pay day) and set up a 'Pay as you earn' PAYE payroll scheme

• Registering for VAT or for the Construction Industry Scheme if applicable to your business.

Ensuring you comply with all regulations applicable to your business, including health and safety regulations, consumer rights laws, data protection and GDPR including registering with the ICO.

As a sole trader you do not have to give your business a name - you can trade under your own name if you prefer. However, if you do choose a name for your business, it has to comply with the rules for naming sole trader businesses.

This means that your name cannot:

• contain words relating to other business structures (like 'limited', ‘ltd’ or ‘plc’)

• be anything offensive

• be too similar to the trademarked name of another company or other trademarks (you can search for trademarks and check company name availability).

If you do name your business you must include it in all of your invoices, letters, and other official business paperwork, along with your own name.

For more information on naming your business see our guide or visit HMRC.

The next step is to let HMRC know you’re self-employed by registering for self-assessment.

You have to register with HMRC if you earned more than £1,000 before tax relief in the last tax year and are a sole trader who is self-employed. You can only register your business if you will be starting within the next 28 days. You must do this within six months of the end of the tax year in which you begin trading (so by 5th October in your second tax year) or you may have to pay a penalty.

Use the HMRC tax tool to see whether there are other taxes, rules, and other registrations you may need to complete (such as VAT).

Once you’ve registered for self-assessment, HMRC will give you a 10-digit unique taxpayer reference (UTR), which you’ll need whenever you contact them. Remember to make a note of it.

If you earn over the threshold, you will need to sign up for Making Tax Digital (MTD) once you have submitted your first Self Assessment tax return. MTD is a UK Government initiative to modernise how sole traders report their income and expenses to HMRC and submit tax returns.

From 6 April 2026, some sole traders and landlords must use it, based on their total annual income from self-employment and property. 

You will need to:

• use compatible tax software that works with Making Tax Digital
• create and store digital records of all your income and expenses
• send quarterly updates to HMRC
• submit your tax return and pay tax due by 31 January the following year

See HMRC’s Making Tax Digital guide for more information.

Accurate record-keeping is essential in running your business and complying with law. You could be fined if you don’t keep sufficiently accurate financial records - preferably for the last six years of trading. You will find more information at HMRC.

What should your records cover?

Your records should cover all money coming in and going out of your business. You’ll also need to differentiate between personal and business use of equipment such as computers and keep records of your personal income.

You’ll need to:

• choose from and to dates for recording your income and expenses - it can be easier to stick to the tax year of 6 April to 5 April
• choose an accounting method - most businesses can use the default cash basis accounting, but you can opt to use traditional accounting.

If you earn over the Making Tax Digital threshold, you or your tax agent will need to create and store digital records of your income and expenses as well and send quarterly updates of your income and expenses to HMRC, using MTD for Income Tax compatible software. For more information see HMRC.

Using tax compatible accounting software options such as FreeAgent or Xero can help all businesses, not just those eligible for Making Tax Digital.

What records should you keep?

You must keep records of:

• all of your business’s sales and income
• If you employ people, all PAYE records
• VAT records (if you’re registered for VAT)
• records about your own personal pay and income
• all of your business expenses including simplified expenses.

You must keep proof of all your records, including bank statements and all receipts and invoices. (If you are signed up for MTD you will need to keep digital records as well as physical).

Keep these records for at least 5 years.

Note: If you’re using traditional accounting you will need to keep additional records to include in your tax return, such as what you’re due but haven’t yet received.

National Insurance contributions

The two types of National Insurance you may have to pay are Class 2 and Class 4. The class you pay depends on the profit you make from your business.

If you do not make enough profit you do not have to pay NI but you can choose to make voluntary contributions to avoid gaps in your National Insurance record. Most people pay their National Insurance contributions through their tax returns.

Find more information on National Insurance rates and if you need help or advice, speak to a qualified accountant or tax adviser.

Tax

Alongside National Insurance contributions, as a sole trader you will need to pay income tax on the profits you make. Sole traders do not pay corporation tax, but you may have to pay other taxes if they apply to your business, for example, VAT.

Check what taxes may apply to you as a sole trader, and if in any doubt speak to a qualified accountant or tax adviser.

How to budget for your payments

Planning for your payments means avoiding late payment penalties - particularly as you won’t get your first bill for quite some time. Use HMRC’s tool to help you estimate your self assessment tax bill and set money aside.

Larger businesses have greater responsibilities than smaller ones, such as VAT and staff. So as your business grows, you’ll have more to think about.

Taking on staff

If you need to take on staff, you will likely need to register as an employer. You need to register to get your employer PAYE reference number before the first payday.

You’ll also have other responsibilities such as paying your employees at or above minimum wage, paying statutory sick pay (or using your own company scheme), workplace pension schemes, and other statutory payments.

Read more about employing people with HMRC’s step by step guide to employing someone for the first time.

Running your PAYE payroll

If you hire staff, you’ll need a PAYE system to pay them and make the appropriate deductions for National Insurance, income tax, or student loan payments and ensure you deduct the correct amount of income tax and National Insurance payments from your staff and pay these to HMRC.

You can do this by either paying a payroll provider (such as an accountant) to do it for you or doing it yourself using payroll software such as IRIS software or FreeAgent.

What is VAT?

Value added tax (VAT) is charged on products and services from VAT registered businesses. If your business’s taxable turnover reaches the VAT registration threshold, you’ll need to register for VAT.

HM Revenue and Customs (HMRC) has lots of useful content and tools to help sole traders understand their tax obligations.

Key ‘step by step’ guides include:

• Set up as a sole trader

• Making Tax Digital

• Employing someone for the first time.

If you need help with setting up as a sole trader or in understanding and preparing your taxes, seek help from a qualified accountant or tax adviser.