Register As A Sole Trader In The UK: A Complete Step-By-Step Guide
Written by Rita Krekovska ACMA, CGMA
| Published on January 26, 2023
- Fact Checked by Iniobong Uyah
- Updated in last 6 months
If you want to be your own boss, get out of the 9-5 race and start to work 24/7, or get an additional source of income to complement your job, then starting your own business is the first thought that comes to mind. In the UK, it is quite easy to start a business and the government provides certain benefits[1] to business owners. However, before you’re eligible for these benefits, you must register as a sole trader, a limited company, or a partnership.
Registering your business is the only way to legalize it and avoid being fined by the HMRC. Most business owners start as sole traders, and if you like to know how to register your business as a sole trader, then you’re in the right place. In this article, I’ll guide you through the sole trader registration process and much more. Here’s a breakdown of all I’ll be talking about:
What is a Sole Trader?
A sole trader is a business structure where one person owns the business and is also responsible for its day-to-day operations. Most small business owners operate this way and are referred to as sole traders. Although the sole trader business is quite small in size, this form of business makes up more than half of businesses in the UK’s private sector[2] in 2022. So out of about 5.5 million businesses:
- 3.1 million are sole traders,
- 2.1 million are limited companies,
- 353,000 are ordinary partnerships.
In essence, a sole trader is the most common form of business in the UK primarily because it is easy to set up. Also, the sole trader is closer to the customers and can react easily to their needs. This flexibility is because the owner has full control over the business, makes all the decisions, and can easily change their mind as to what direction the business should go without the need for approval from a board or business partner.
Sole traders are typically in the service sector providing services like plumbing, repairs, and maintenance, retail shopping, photography, personal training, housekeeping, tutorship, consultations, etc. These types of businesses drive the economy of the UK[3] and before I outline the benefits of being a registered sole trader, here’s one point I need to make clear.
Sole trader vs Self-employed: What is the difference?
The difference between a sole trader and a self-employed is nuanced at best. Here is a short illustration to help out. Three friends Tom, John, and Harry are small business owners. Tom runs a small repair shop while John and Harry are co-owners of a retail store. Now all three men, Tom, John, and Harry are self-employed but only Tom is a sole trader. What this means is that sole trader is a form of self employment but not everyone who is self-employed is a sole trader.
If you are the co-owner of a business (like John and Harry), then you are not a sole trader even though you are self-employed. This form of business (having co-owners) is known as a partnership. The sole trader makes all business decisions, enjoys the profits, and equally bears the losses incurred by the business all alone. But in a partnership, both partners take business decisions together and they also share the profits and losses as well. This is the major difference between a sole trader and a partnership.
What are the benefits of being a sole trader?
Before making any decision, it is only natural to want to know what the benefits are. In this section, I have outlined the benefits of being a sole trader but to make it clearer, I have also made subtle comparisons between a sole trader and a limited company to help you decide which form of business is good for you and why. You can read this article for a more in-depth comparison. That being said, here are 5 major benefits of being a sole trader.
Sole traders have full control of their business
When talking about the benefits of being a sole trader, it is only fair that this comes first. As a sole trader, you hold the reins of the company and are answerable to no one. You direct and control the direction of the company without the need for permission from a partner, shareholders, or a board of directors. This can be very liberating.
Sole traders can easily adapt to meet the needs of their customers
Because sole traders have full control over the business, they can quickly adapt to changes. This is one of the reasons why sole traders have a good relationship with their customers. Their small sizes and the absence of a chain of command means fewer hoops to jump through when making changes. So the time frame between when customer feedback is logged and the necessary changes made is shorter.
It is easy to set up and cost-effective
Nobody likes to deal with the paperwork but this is inevitably one of the daily grinds of owning a business. However, the sole trader has one advantage which is less paperwork to worry about. This is partly because as a sole trader, you’re not required to register with Companies House which caters to Limited companies, and the tax process and other documentation are less tedious compared to other forms of business.
Sole traders get to keep all the profits
Sole traders don’t have shareholders. This is a big word for a bunch of people who don’t have to do any work but get to share in the profits of your business. Well, shareholders have their role to play in the grand scheme of things. But a sole trader does not need shareholders and that means they get to take home all the profits (after tax deduction). This makes payday a lot more rewarding doesn’t it?
Sole traders have a lot more privacy
If you choose to set up as a limited liability company (LTD), then you must register with Companies House. This is a government agency that incorporates (and even dissolves) companies in the UK. Registering with the agency also means that your private information (including company earnings, profits, and losses) will be available to the public. But a sole trader doesn’t have to go through such a process.
How to register as a sole trader
As you would soon see, the sole trader registration process is straightforward. Here is how to go about it in 4 easy steps.
Step 1: Get all your information ready
There is some information you need to complete your registration. These include your name, date of birth, postal address, telephone number, email address, Government Gateway login details, and National Insurance (NI) number. Most people do have their personal information handy, so let’s focus on the two most important pieces of information:
Government Gateway Login – this information is required to access the HMRC online services. The HMRC portal is where you can set up your personal or business tax account, Self Assessment, Corporate tax, PAYE for employers, and VAT.
National Insurance Number – most people living in the UK do receive their NI number by the age of 16. But if you don’t have one, you can apply for it here if you are resident in the UK and you are working or you have the right to work in the UK. The National Insurance number is necessary when paying for Class 2 and Class 4 contributions.
Step 2: Name your business
Your business name is its identity, and while you are free to give your business any name you wish, there are a few guidelines you must adhere to:
- The name should not be offensive
- Make sure the name or logo is not already trademarked otherwise, you may face legal action.
- It must not have the following connotations – LTD (Limited), LLP (Limited Liability Partnership), or PLC (Public Limited Company).
- It should not contain any word or expression that suggests a connection with the government.
(Note: As a Sole Trader you can use your actual name as your business name.)
Step 3: Register your business with the HMRC
Once you have come up with an acceptable business name, then follow the steps below to register your business.
To register online:
- Head over to the HMRC website and click sign in. You will be redirected to the page were you need to log in with your Government Gateway ID and password
- Fill in the required information on the HMRC form and submit
- You will receive a Unique Taxpayer Reference (UTR) number from HMRC after 10 days if you live in the UK, and 21 days if you live abroad. The UTR is a 10-digit code that you will need when filing your Self Assessment tax return.
- You’ll also receive emails reminding you to complete your Self Assessment tax return before the due date.
To register via post:
- Fill out the registration form and print it out
- Post the printed form to HMRC (see Step 4)
- You will receive a Unique Taxpayer Reference number from HMRC after 10 days if you live in the UK, and 21 days if you live abroad. The UTR is a 10-digit code that you will need when filing your Self Assessment tax return.
- You’ll also receive a letter reminding you to complete your Self Assessment tax return before the due date.
Step 4: Complete your Self Assessment tax return before the deadline
Once you have received your UTR number, sign into the Government Gateway portal with your user ID and password (see step 1 if you don’t have this) and fill out the Self Assessment tax return form. Alternatively, you can submit via post if you live in the UK. But if you live overseas, you can only complete this step via post by filling out the SA100 form and sending it to the following addresses:
Sole trader registration deadlines in the UK
The HMRC has a deadline for registration each tax year. The current tax year started on 6th April 2022 and runs till 5th April 2023. Here are the deadlines you should have in mind:
Deadline for Registration – 5th of October 2023.
Deadline for Self Assessment tax return – 31st October 2023 for those who submit via post, and 31st January 2024 for those who submit online.
You may have to pay a fine if you fail to file your tax return before the deadline. The fine amount will depend on how long you have delayed. £100 if it’s up to 3 months late and more if it exceeds 3 months.
Frequently Asked Questions
Can I register myself as a sole trader?
Yes, you can register yourself as a sole trader by simply following the steps laid out in this article. But if you need assistance, you can reach out to me and get it done for free.
How long does the registration take?
The sole trader registration process can be completed within an hour if all the information needed is readily accessible. But it will take between 10 to 21 days to get the UTR number.
Do I need insurance as a sole trader?
No. You are not required by law to have insurance. However, it is a good idea to protect yourself and your business from unforeseen circumstances. Because of this, it is recommended that as a sole trader, you get insurance coverage for yourself, your business, or both. The type of insurance and coverage will depend on you, but income protection insurance and public liability insurance are good for a start.
What are the risks of being a sole trader?
Being a sole trader is not all fun and games. There’s a huge burden you bear every day and that’s being personally liable for anything that happens in your business.
In a limited liability company, for instance, the owner of the business is not personally liable for the damages and debts owed by the business. So if the business is sued or becomes insolvent, the business owner doesn’t lose his/her assets because their assets are separate from that of the business.
But sole traders have unlimited liability meaning that the personal assets of the business owner and the business assets are one. So if the business gets sued or becomes insolvent, the owner could lose his/her assets in the process.
Do I need an accountant as a sole trader?
By law, you do not need an accountant if you are a sole trader, but it is generally a good business practice to have an accountant. This will help you manage your business more effectively and also provide a financial trail for tax auditing should the need arise. For this purpose, you might need an accountant who will make sure your books are up to date while you focus on other areas of your business.
How much does it cost to register as a sole trader in the UK?
Sole trader registration is free. It will just take a little bit of your time to get all necessary information and complete the registration forms.
Do sole traders pay tax and National Insurance Contributions?
Yes, sole traders pay taxes depending on how much income they make. If the income is below the standard personal allowance of £12,570, you won’t have to pay tax on this. But if you earn more than that, then you’ll be taxed depending on how much you earned:
- 20% if your income falls between £12,571 and £50,270
- 40% if it is between £50,271 and £150,000
- 45% if you made more than £150,000 in a tax year
For National Insurance Contributions (NIC), every sole trader is expected to pay Class 2 and Class 4 NIC when they have profits of more than £11,908 a year. If your profits are below £11, 908, it is not mandatory to make these contributions. However, you can still pay voluntary Class 2 insurance contributions to avoid gaps in your insurance records.
Read more about this under Sole Trader taxes.
Does a Sole Trader pay VAT?
Yes. Sole traders are required to register for VAT with HMRC but only if they have an annual turnover of more than £85,000 in 12 months. This amount is known as the VAT threshold.
Do Sole Traders need to register for MTD?
Sole traders will need to register for MTD. But for now, only VAT- registered businesses can apply. Initially, MTD registration was only mandatory for businesses with an income above the VAT threshold (£ 85,000). But the new rules demand that every VAT-registered business must apply and pay VAT through MTD. non-VAT registered businesses with a turnover of more than £50,000 will be required to register for MTD starting from 2026. While those with an annual turnover of £30,000, will be required to register from 2027.
How to employ people in my Sole Trader business?
Although some traders are known to work alone, it doesn’t mean they can’t have employees. However, to remain a sole trader and still be able to hire employees you must inform HMRC. Take note that there are a lot more processes involved when you become an employer such as registering for PAYE, employer’s liability insurance, being responsible for workplace safety, etc.
How to stop (close) from being a Sole Trader?
There are steps to follow if you want to close your sole trader business. The very first thing to do is inform HMRC about your decision. You can do this online by following this link and filling out the form. Other steps include:
- make sure you send in your final Self Assessment tax return before the deadline
- cancel your VAT registration if you had registered for VAT.
- if you have employees, you must close your PAYE scheme after sending in the final payroll report to HMRC
Conclusion
Sole traders are invaluable to the UK private sector. It is the easiest and cheapest form of business, especially for those who are starting a business for the first time. This explains why most small business owners prefer to register as sole traders.
It is a great way to test the waters and if you ever plan to scale up your business, it is easier to do so by moving upwards from sole trader to a limited company. Despite being a one-man show, you don’t always have to do everything on your own especially when it concerns the accounting aspect of the business.
So if you would prefer to focus on business and let someone else take care of the books, and of course, the registration, feel free to contact me.
References
1) British Business Bank – https://www.british-business-bank.co.uk/finance-hub/
2) National statistics: Business population estimates for the UK and regions 2022: statistical release (HTML) – https://www.gov.uk/government/statistics/business-population-estimates-2022/business-population-estimates-for-the-uk-and-regions-2022-statistical-release-html
3) Passion pays: businesses born from hobbies contribute £39bn to the UK economy – https://www.hiscoxgroup.com/news/press-releases/2022/18-03-22
By Rita Krekovska ACMA, CGMA
Rita is Chartered Management Accountant and online influencer known as Digital Accountant.