Most businesses are run as sole traderships or partnerships. In fact, there are over 4 million sole traders in the UK.
Once you decide that self-employment is the best route for you, it’s time to look at the next steps.
2. Choose a name for your new business
Choose a name that reflects what you do and how you want to appear to the world. You might want to include what you do in your name or the geographic location.
Unlike a limited company, there is no central register of sole traders, nor the same naming rules which apply to companies.
However, we recommend you search the Companies House register—even as a sole trader—to ensure there won’t be a potential conflict with a limited company name.
Also – if possible – search for domain names at the same time. In a perfect world, you will be able to secure a unique business and domain name at the same time.
Don’t forget that your chosen business name will appear on all your official paperwork, so take your time.
3. Register as self employed with HMRC
When you set up as a sole trader (or as a partner in a partnership), you are responsible for paying income tax and National Insurance (NICs) on your business profits.
You have to register as self-employed with HMRC.
You can do this any time up to the 5th October of your second tax year in business.
Tax years run from 6th April to 5th April of the following year.
For example, if you start trading in January 2024, you need to register with HMRC by 5th October 2024.
As a self employed person, you need to submit an annual Self Assessment form by January 31st the year after the tax year in question. When you complete your return, you must also pay any tax and NICs due by the same deadline.
In practice, many small business owners hire an accountant to prepare accounts and calculate the amount of tax to pay.
Self-employed workers pay Class 4 NICs. For the 2024/25 tax year, this is 6% on any annual profits made between £12,570 and £50,270, and 2% on any profits above £50,270.
As a sole trader, you can also pay voluntary Class 2 NICs on your income, if your annual profits are below £6,725 per year. You don’t need to pay Class 2 NICs if your annual profits are £6,725 or more.
For the latest NIC rates for sole traders, check the GOV.UK site here.
6. Work out whether you need to register for VAT
As of April 2024, if your business has an annual turnover of £90,000 or more, you must register for VAT.
At any stage of the business cycle, if you anticipate hitting the annual VAT threshold over the coming 12 months, you must also register.
The threshold usually rises by a few thousand each year. Make sure to inform HMRC within 30 days, or risk paying a fine.
In many cases, you might decide to register for VAT even if you don’t need to. Having a VAT number can give you more credibility, and you’ll be able to claim the VAT back on eligible purchases you make.
You might also consider the flat rate VAT scheme, which makes accounting for VAT much simpler. Your accountant will be able to advise you if you’d be better off on the Flat Rate or standard VAT scheme.
7. Do you need any specific licences or permits for your business?
If you work in some trades or professions, you might need to hold specific licences or permits to conduct your business.
For example, you must be on the Gas Safe Register to work on gas fittings or gas storage vessels in the UK.
You need permission for a multitude of activities, from working as a street trader, or processing personal data.
Use this handy government tool which contains information on over 400 licences, permits and certifications.
8. Open a business bank account
As a sole trader, although your business income is taxed alongside your personal tax, keeping your business records and finances separate from your personal affairs is vital.
If you prefer to bank with a big name, most high street banks offer 12-18 months of free business banking for new businesses. After a trial period, banks typically charge around £10/month, plus fees if you process a lot of transactions.
Some challenger banks, such as Tide, now offer free business accounts. These can be a particularly good option if most of your banking requirements can be done online.
You can typically set up your new account as “John Foster trading as, or T/A, your Business Name.” Having your business name on customer invoices gives it a more professional appearance.
If you expect to keep cash for some time, why not open a business savings account? You can earn interest on your money, especially as interest rates have finally risen about 0% for the first time in a decade.
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9. Make sure you are adequately insured
As a business owner, you must comply with legal (or contractual) requirements to have certain insurance policies in place.
The type of insurance you need to buy will depend on the nature of your business and the industry you operate in. In addition to mandatory policies, you may also want to consider optional insurance coverages for added peace of mind.
If you employ another person, even if it is only an occasional part-timer, you are legally required to take out employers liability insurance.
You need at least £5 million of cover (which is standard), and you must display your certificate of insurance where employees can easily read it. Failure to have a policy can result in a hefty fine.
Most small businesses take out public liability insurance, especially if customers visit you on your premises or if you undertake work on their property.
It will protect you if a third party injures themselves or damages property because of your business activities.
If you provide any type of professional service or advice to clients, you should also consider taking out a professional indemnity policy. It will cover you if a client sues you because they are unhappy with the work you have done, or advice you have given.
ByteStart’s complete guide to sole trader insurance wil help you find out what other insurance policies you might want to consider.
10. Keep accurate and up-to-date financial records
You must keep clear and accurate records of all your business transactions from the start.
Keeping such records will ensure that you keep the tax authorities happy. It is much easier to operate your business if you are organised and keep your paperwork constantly updated.
Online accounting software – such as the excellent FreeAgent – is now used by many small businesses to help simplify their accounting. Your accountant can easily log in and complete their side of the bargain.
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