Sole Trader

If you run your own business and are self-employed, then you’re considered a Sole Trader.

You need to set up as a sole trader if:

• You earned more than £1,000 from self-employment
• You’ve proven or declared you're self-employed
• You make voluntary National Insurance payments to qualify for benefits

Disadvantages of a Sole Trader:

• Personal liability - Your business is not a separate entity from you as the owner. This means you are personally liable for any company obligations, debts, liabilities owed, or legal action against the business. There's a possibility that it may impact your personal finances.
• All profits earned by a sole trader are subject to income tax. This means that a sole trader will usually pay more in tax than a limited company.
• You are also responsible for your own National Insurance payments.
• Perceived lack of prestige - Public perception of sole traders is not as high as having your own business.
• It may be challenging to raise capital to expand the business as a sole trader because traditional financial institutions prefer limited companies, like banks and granting foundations.

Sole Trader Requirements

National Insurance

You pay either Class 2 or Class 4 National Insurance as a sole trader.

• Class 2 - If your profit is at least £6,725 per year
• Class 4 - If your profit is at least £9,881 per year

Record Keeping

• As a sole trader, you must keep records of the following:
• Business income and expenses
• Personal income
• VAT records
• Grants, if claimed through the Self-Employment Income Support Scheme
• All receipts, bank statements, and sales invoices

Keep records for at least five years after submitting your tax returns

How to Register as a Sole Trader:

1. Choose a name to trade under. You can use your name or choose another name for your business. However, keep in mind that you’re not allowed to use the following words in your business name: 'limited', 'Ltd', 'limited liability partnership', 'LLP', 'public limited company', plc'. Further guidance on naming can be found here.
* You don’t need to register your business name unless you want to register your name as a trademark to the Intellectual Property Office (IPO).

2. Register for Self Assessment to pay income tax.

• If it’s your first time, set up your business tax account here. You’ll receive your Unique Taxpayer Reference (UTR) number within ten days. The UTR is needed to file your yearly tax return. You can get guidance through these helpsheets.

3. If you do not have one, you will need to apply for a National Insurance number, the processing takes about eight weeks. Below are the requirements:

• Identification documents such as a passport, biometric residence permit (BRP), national identity card from any EU country, Norway, Liechtenstein, or Switzerland
• Photos to prove your identity

4. Register for VAT if necessary. If your total VAT taxable turnover for the last 12 months was over £85,000, then register for VAT with the HMRC.

You can authorize another person to do all transactions with the HMRC, be it a friend, relative, accountant, or tax adviser. The UK government has provided tax agents standards that you can base off of.