How to set up a Sole Trader business
The simplest business structure, there are more sole trader businesses in the UK than any other business set up.
If you are considering setting up a sole trader business, below is an overview of what being a sole trader means from a legal perspective, your key responsibilities, the finance and accounts of a sole trader business, some tips on managing your accounts and key dates you need to be aware of. In addition, there is a downloadable guide on how to set up a sole trader business.
What it means to be a Sole Trader
To run a sole trader business means you are running your business as an individual, not a Limited Company, making you self-employed.
Sole Traders pay Income Tax (and National Insurance) calculated by way of a Self Assessment Tax Return (SATR). This means you get to keep all your businesses profits, after Income Tax and National Insurance contributions are paid. The flip-side of this is you are personally responsible for any debts or losses made by the business. This means you can be personally pursued for any unpaid debts by suppliers or HMRC.
As a sole trader you can trade under your own name, or another business name. Unlike Limited Companies where the company name is registered with Companies House, you do not need to register your company name anywhere, allowing you more flexibility in company name choice. If you do trade under a business name, you cannot use Ltd or Limited in the company name.
Sole traders can have more than one sole trader business and/or have a directorship and shareholding in Limited companies as well. If you have more than 1 sole trader business, HMRC does not distinguish between you and your separate sole trader businesses. This means that the combined income of the sole traders businesses would be considered when looking at VAT thresholds and tax banding.
As a sole trader you can be VAT registered and an employer.
Key Responsibilities of a Sole Trader
Once you earn over £1,000 in your sole trader business, you must register for Self Assessment. Once registered, you will have a Government Gateway log in and be issued with a 10-digit Unique Tax Reference (UTR). You can only have 1 UTR, therefore if you have multiple sole trader businesses, you only report under 1 tax reference.
You must submit a self-assessment tax return every year, by the deadline, to avoid a financial penalty.
You have the personal responsibility to pay all Income Tax and NI liabilities calculated on your self-assessment.
You have a responsibility to understand, for your business, what is and is not a tax deductible expense. That doesn’t mean you need to know all the rules for deductible expenses – but you do need to understand what these are for your business. It is worth mentioning here that your drawings from your sole trader business and pension contributions are NOT tax deductible from a sole trader business.
You are required to keep a record of all your business sales, expenses and bank transactions. These can be either paper or digital copies. These records must be kept for a period of 5 years after the tax return submission date. For ease, I’d recommend keeping for 6 years from the year end. If you close your business, you are still required to keep the records for these timescales.
You need to have suitable insurance for your business. Broadly speaking, there are 4 main insurances: Public Liability if you have premises that the public/customers come into (you would also need relevant buildings/contents insurance for this also); Professional Indemnity cover for businesses who provide services; Product Liability if you sell products; and Employer Liability if you are a registered employer and employ staff.
If your turnover exceeds the VAT-threshold (currently £85k in any rolling 12-month period), you are required to register for VAT. Bear in mind that if you have more than 1 sole trader business, the combined income of the businesses is what makes up the VAT-able turnover.
Finance and accounting for a sole trader business
There is no legal requirement for a sole trader business to have a separate bank account. However, this is highly recommended. It makes it easier for you to manage your business’ finances. For more advice on choosing a business bank account, read this short article.
At the time of writing, if your business is not VAT-registered, using a spreadsheet to record your business accounts is sufficient. However, Making Tax Digital is a government initiative that is coming down the line for sole trader businesses meaning you would need to use a digital software for accounting purposes in the future. To find out when this would impact you, read my article on MtD.
If you decide to use a Software, take advantage of any free trials being offered and try a couple to identify which one you prefer. You read more on choosing accounting softwares here.
A question I am frequently asked is “I’ve invoiced my customer on 20th March and they paid on 10th April, which tax year do I include this in?”
Generally speaking, the tax point, that is the date you include the figure in your accounts, is the date on the invoice, not the date payment was made. This applies to both sales and purchases. This is called ‘accrual’ basis accounting. You can do ‘cash’ accounting – that is you count the payment date as the date you include in your accounts…however, from experience, this can be a bit more complicated and can confuse reporting, so I always advise clients to use the date of the invoice (sales or purchase invoice) as the date to include in your accounts.
If you are a service business, it is good practice to date your invoices in the month you delivered the service. It is perfectly acceptable to date your invoice, say, 30th of the month, and issue it a few days later.
Briefly, invoices you send should include:
Your company name and contact details
Name of your customer
Date
Details of the service/produce you are selling
Amount due
Payment terms (i.e. Please pay by…, or Please pay within 14 days)
Bank details or payment link to pay via card
If you are VAT registered, you must also include your VAT number and a breakdown of the VAT charged.
I would always recommend you send your invoices as a PDF rather than editable Word document.
A few tips on managing your business finances
Treat managing your business finances like an appointment with a client. Doing your books can often end up being the last thing on your list of priorities! I recommend putting a regular time in your diary like you would an appointment with a customer, and ring-fence this time to keep your business finances up to date.
If you have a tricky financial situation, e.g. cashflow challenges or non-paying customers, give this your full priority. It won’t resolve itself unfortunately, so make this your number one priority.
Create a budget & a cashflow – even if you are new to business. A budget is a plan of what you intend to spend. A cashflow is your crystal ball to foresee your bank balance to help plan and mitigate any issues. Learn more about Cashflows here.
Be aware of your financial position. That is, have a good idea of your current bank balance, amounts outstanding from customers or to suppliers, future financial projections including Tax estimate, and where you are in your business’ financial goals. Using a cashflow and regular finance appointments in your diary will help with these.
Finally – have a savings/reserve bank account to save for Tax! Or use the saving spots/spaces that some bank accounts offer to keep that tax saving pot out of your main bank balance.
Key Dates for Sole Trader Businesses
Your business’ financial year runs to the fiscal year, that is it starts on 6th April and ends on 5th April the following year. However, HMRC does allow for 31st March to be used as your year end, meaning you can run your business’ financial year as 1st April to 31st March.
The deadline for your self-assessment return to be submitted is 31st January the following year.
This is also when you pay any Tax & National Insurance Contributions due.
If you are asked to make a Payment on Account for tax, this will be paid in two parts: 31st January & 31st July. A Payment on Account scenario happens when your tax liability exceeds £1000. If this happens, you will be asked to pay the full tax due for the year you are reporting for PLUS an additional 50% at the same time…so be aware of this. This payment of tax due plus 50% would be due on 31st January, and the 2nd 50% would be due on 31st July – these are considered payments towards your next year’s tax liability.
Making Tax Digital requirements for Sole Traders earning over £50k will come into force on 6th April 2026; and for Sole Traders earning over £30k on 6th April 2027
Are you ready to set up your sole trader business?
Download this PDF to give you some practical guidance on registering for self-assessment, along with some useful links to learn about tax deductible expenses and calculating tax and NI.
