Setting Up as a Sole Trader
The way you operate your business determines the taxes you pay and your reporting obligations. If you work for yourself and run your business as an individual, without forming a limited company, you’re considered a sole trader. This is different from operating through a personal company, even if you’re the only employee and director, as the company has its own legal identity.
Taxes and National Insurance for Sole Traders
As a sole trader, you’ll pay income tax and Class 4 National Insurance contributions (NICs) on your profits. For 2023/24 and earlier years, Class 2 NICs were also payable.
Registering as a Sole Trader
Your registration obligations depend on whether you’re already registered for Self Assessment (SA), which might be the case if you have rental income to report to HMRC, and your level of gross trading income.
- Not Registered for SA: If your trading income exceeds £1,000 for a tax year, you must register for Self Assessment by 5 October following the end of the tax year (e.g., by 5 October 2025 if you start self-employment in 2024/25 and have gross trading income over £1,000). Register online at Gov.uk.
- Already Registered for SA: If you’re already registered for another reason, you’ll need to register as a sole trader for SA to be liable for Class 4 NICs. You can also register if you have low profits but want to pay voluntary Class 2 NICs.
Gross Trading Income of £1,000 or Less
If your gross trading income (before expenses) is £1,000 or less, you can use the trading allowance to enjoy your profits tax-free without notifying HMRC.
- Income Over £1,000: If your income exceeds £1,000, you can still benefit by deducting the £1,000 allowance instead of actual expenses, which is useful if expenses are below £1,000. In this case, you must be registered as a sole trader for SA.
- Made a Loss: If your income is £1,000 or less but you’ve made a loss, it’s beneficial to register and file a tax return to claim relief for the loss.
Record Keeping
You must keep records of your business income and expenses. Guidance on record-keeping is available on the Gov.uk website at www.gov.uk/self-employed-records.
Income Tax and National Insurance
As a sole trader, you’ll pay income tax on your profits. From 2024/25 onwards, the profits taxed for the tax year are those for the tax year (6 April to 5 April), regardless of your accounting date. An accounting date between 31 March and 5 April is treated as corresponding to the tax year.
- Income Tax: Your liability is based on your total income for the tax year, including self-employment profits. File a tax return by 31 January after the end of the tax year (e.g., by 31 January 2026 for 2024/25).
- Class 4 NICs: Payable on profits over £12,570 at 6% (between £12,570 and £50,270) and 2% on profits above £50,270.
Your tax and Class 4 NICs must be paid in full by 31 January after the end of the tax year. If your total liability for a tax year is £1,000 or more, you must make payments on account for the following tax year on 31 January in the tax year and 31 July after the tax year, unless 80% of your tax is collected at source, like through PAYE. Each payment is 50% of the previous year’s liability.
VAT
You must register for VAT if your VAT taxable turnover reaches the VAT registration threshold of £90,000.
Need Help Setting Up as a Sole Trader?
Setting up as a sole trader can be straightforward with the right guidance. For expert advice and support tailored to your situation, contact Jon and the team at Jon Davies Accountants. We’re here to help you navigate your business’s financial and tax obligations smoothly.
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