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Everything you need to know about becoming a sole trader in the UK

Thinking about going self-employed? Congratulations. Becoming a sole trader and being your own boss is quite the adventurein a good way, of course (well, mostly). Free from the shackles of full-time employment, you’ll enjoy complete control over your finances, career path and general working day. 

But before you take the leap and go self-employed, there are some things you should know. In this piece, we explore the basics (and we use ‘basics’ because there’s a lot to know) of becoming a sole trader. So without further ado, here’s everything you need to know (for now)…

What is a sole trader?

A sole trader is ultimately a self-employed person who owns all of their own business. Once they’ve filed their annual returns and paid any due tax, all profits are ultimately theirs to keep. At the same time, they’re personally responsible for any business losses since they’re not a separate legal entity. Swings and roundabouts, we guess.

Becoming a sole trader vs a limited company

When you go self employed, you ultimately have the choice of becoming a sole trader or setting up a limited company. If you expect multiple income streams and have plans for expansion (and world domination, of course), a limited company can sometimes be more linear and tax-efficient. But then again, so can being a sole trader. It ultimately depends on your earnings and circumstances.

To start off with then, we recommend becoming a sole trader. This way, all earnings will be paid directly to your bank account (rather than to your limited company, which you then pay yourself from) and you’ll know where you’re at. With 60% of British businesses also sole traders, you’re in good company (Source: Gov). And as time goes by, if your business size and nature changes, setting up a limited company is easy to do. So long as somebody hasn’t already registered the name, you can keep your original sole trader name.

Setting yourself up as a sole trader

Becoming a sole trader is reasonably simple and straightforward. The first thing you need to do is register for self assessment. This is the system that HMRC uses to collect details on your earnings and more importantly (for them), your income tax. If this is your first time using the system, you’ll receive a 10-digit Unique Taxpayer Reference. This will be used on all email and post correspondence, as well as in your online HMRC portal as you file your returns, pay your tax bills and check your balance.

If you’ve already registered for a UTR (but can’t find it), you can find your UTR here. Once you’ve got it, you’ll need to re-register by filling out a CWF1 form. Alternatively, you can register as a sole trader by printing off the form and sending it to the listed address on the form. Alternatively, you can call HMRC on 0300 200 3310.

What information do I need to provide?

When setting yourself up as a sole trader, you’ll need to provide the following:

  • Your name
  • Date of birth
  • Postal address
  • Contact details (mobile and email)
  • National Insurance (NI) number
  • Name of business
  • What type of work you do
  • Start date

Make sure you register by 5th October on your second business year in time for the following January to file your return. Whilst we know this deadline may seem like a long way off and ultimately, a bonus, it’s better to get on top of things sooner rather than later. After all, you want to get your business off on the right foot. 

One of the additional benefits of registering as a sole trader rather than a limited company is that it’s completely free. In addition, operating as a sole trader is significantly cheaper. This is because there’s less administrative effort involved in your accounts. So if you do hire an accountant, your annual bill will be cheaper (in theory). 

What do I need to keep track of?

When you’re a sole trader, you’ll need to keep track of all your sales and expenses. Bought a computer? Keep the receipt. Taking a train for a work appointment? Hang on to your travel ticket. Then at the end of each business year (so 6th April to 5th April the following year), you should compile all your earnings and expenses together and hand it to your accountant. Or if you’re filing your own self assessment, organise them together and keep them to one side.

It’s important to note that 31st January and 31st July are two annual deadlines to keep in mind. Every year. On the 31st January following the end of your tax year, your annual tax will be due. In addition, HMRC will request a little something called ‘payments on account’, which are essentially advance payments on your tax. We’ll be honest—payments on account can feel like a bit of a sting in your first year as essentially it means you pay up to 150% of what you were probably expecting in the January. The remaining 50% will then by payable in July. But by paying your following year’s tax bill in two instalments, it essentially helps you ‘spread the cost’ of your taxes, while providing the Exchequer with a mid-year financial boost.

If you expect your earnings to drop from the previous year, fret not. You can apply to reduce your payments on account by logging in to your online HMRC portal. In fact, we recommend logging into your HMRC portal regularly just to keep an eye on things. And if you’re unsure about something, contact HMRC directly. After all, it’s better to be safe than sorry.

But it’s not all danger and deadlines. Let’s close off this piece by reminding ourselves of some of the (many) benefits of becoming a sole trader.

The benefits of becoming a sole trader

You are your own boss. You decide the direction of your own business. And whilst you probably won’t earn if you take a vacation, you’re crucially in charge of your vacation. And your working day. Are you a night owl? Start your day at 4pm and work until 2am. Or… why not commence your day early to free up your afternoons and evenings for leisure? It’s completely your call remember.

All profits are also all yours to keep. Yes, that’s right. All yours. Not to mention, it’s free to register and you’ll enjoy maximum privacy when it comes to earnings unlike with a limited company. That said, you can move over to a limited company structure if and when you fancy it. After all, you’re in charge remember.


And if you want to send money as a sole trader, we’re here to help. Sign up today for easy online money transfers.


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