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How to become a sole trader

Ready to branch out on your own? If you’ve always wanted to work for yourself, now could be the time to do it. Here’s how to go about becoming a sole trader.

Ready to branch out on your own? If you’ve always wanted to work for yourself, now could be the time to do it. Here’s how to go about becoming a sole trader.

Written by
Anna McEntee
Insurance comparison expert
Last Updated
4 APRIL 2023
5 min read
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What is a sole trader?

If you’re self-employed, or run a business as an individual, then you’re a sole trader. What this means is that once you’ve paid your tax, you get to keep any profits the business makes. But it also makes you personally responsible for any losses.

As a sole trader, you’re 100% in charge of your business. There are no partners, directors or shareholders – it’s just you.

Do I need to register as a sole trader?

You’ll have to register as a sole trader if:

  • You earned over £1,000 through freelance work during the past tax year.
  • You need to prove that you’re self-employed (let’s say, you want to claim tax-free childcare).
  • You want to make voluntary National Insurance payments so that you’re eligible for benefits.

How do I register as a sole trader?

To set up as a sole trader, you just need to register online with HMRC. You’ll need to tell them that you pay tax through Self Assessment, then file a tax return every year.

If you’re not sure if your work is considered self-employed, you can use HMRC’s Check Employment Status for Tax too to help you decide.

How to become a sole trader

It’s actually pretty easy to become a sole trader, but there are certain responsibilities that come with it. For example, as a sole trader you’ll need to:

  • Keep records of your sales or earnings, along with all your expenses.
  • File a Self-Assessment tax return each year.
  • Pay income tax on your profits.
  • Pay National Insurance through Self Assessment. How much you pay will depend on your profits. You’re not obliged to pay until you’re making a profit of £6,515 or more a year, but you may choose to make voluntary contributions.

You can do all this by yourself, but many people find it easier to employ an accountant to do it for them.

How do I register for VAT as a sole trader?

If you’re turning over more than £85,000 a year, then you have to register for VAT. If your turnover is less than that, you’re not legally obliged to register. However, if your clients are VAT-registered businesses, you may want to do so as it means you can claim back the VAT.

What insurance do I need as a sole trader?

What insurance you’ll need as a sole trader will depend on lots of things, such as what line of work you’re in. Here’s a few options you might want to look into:

Employers’ liability insurance

While you might work alone, you may need to hire someone for the long or short term. And if you have employees – even just one – then by law you’ll need to have employers’ liability insurance.

Public liability insurance

Public liability insurance is what protects you if your work involves dealing with the public. It’s what covers you if property is damaged or someone is hurt or killed as a result of your business activities. Public liability insurance isn’t a legal requirement, but it can give you peace of mind.

Professional indemnity insurance

Professional indemnity insurance could protect you if a client makes a compensation claim against you. This might happen in cases of professional negligence, acts of defamation, injury or property damage. Again, it’s not a legal requirement, but these days many companies won’t work with you if you don’t have it in place.

Contents insurance

If you’re working from home, you may need to extend your home contents insurance so it covers your computers and other tech, as well as any business equipment you might use.

If you’re a tradesperson looking for the right level of insurance, you’ll find more information in our guide to tradesperson insurance.

How long does it take to become a registered sole trader? 

When you register with HMRC, you’ll need to create an account with Government Gateway, HMRC’s IT system. To use this, you’ll need to get an activation code, which could take a few days to arrive. You can still work in the meantime though.

What are the alternatives to becoming a sole trader?

If you’re setting up your own business, then becoming a sole trader isn’t the only option available to you. You could also:

  • Set up a limited company
    Limited companies are legally separate from the people who run them. This means you can keep your company finances separate from your personal ones.
  • Become part of a business partnership
    This is where you and your business partners share responsibility for the business. You both pay tax on profits and share what’s left over.
  • Form a limited liability partnership
    With this, each partner’s liabilities are limited to how much you put into the business. What that means is that if the business fails, creditors won’t be able to seize your home or personal income.

Choosing how you operate your business is an important decision, with lots of implications – particularly when it comes to tax. We recommend talking to a professional advisor before you decide.

Frequently asked questions

Can I become a sole trader working from home?

Very much so. Lots of sole traders work from home, particularly post-Covid.

How much does it cost to become a sole trader?

It doesn’t cost anything to become a sole trader – all you have to do is register with HMRC.

Will I make more money as a limited company or sole trader?

That depends on your personal circumstances. Many self-employed people find that it’s more tax efficient to form a limited company. However, there are pros and cons to this, so it pays to talk to a professional.

Can you become a limited company after being a sole trader?

Yes you can. But you must make sure you let HMRC know. You’ll also need to tell them if you stop being self-employed.

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Anna McEntee - Insurance comparison expert

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