Thinking of starting your own business? Going it alone as a sole trader is one of the easiest ways to get up and running—but before you jump in, there are a few important things to consider.
From registering with HMRC to understanding tax and National Insurance, here’s everything you need to know about setting up as a sole trader.
What is a Sole Trader?
A sole trader is someone who runs their business as an individual. It’s the simplest business structure—no partners, no shareholders, just you in control.
But while it’s easy to set up, being a sole trader still comes with legal and tax responsibilities, so it’s important to get everything right from the start.
How to Register as a Sole Trader
Before you start trading, you’ll need to register with HMRC for Self Assessment if your annual trading income is £1,000 or more. This applies to your total income across all sole trader businesses, not just each one individually.
- Already registered for Self Assessment? No need to register again—just complete the Self-Employment pages of your tax return.
- New to Self Assessment? You’ll need to register by 5 October following the end of your first tax year.
- Previously registered but not filed a return recently? You’ll need to reactivate your account with HMRC.
You can register quickly and easily via Gov.uk here: www.gov.uk/register-for-self-assessment
Understanding Tax and National Insurance
As a sole trader, you don’t pay Corporation Tax like limited companies do. Instead, you pay Income Tax and National Insurance on your profits.
Income Tax
Your business profits are added to your total taxable income for the year and taxed as follows:
- Up to £12,570 – Tax-free (personal allowance)
- £12,571 to £50,270 – 20% basic rate
- £50,271 to £125,140 – 40% higher rate
- Over £125,140 – 45% additional rate
Earning over £100,000? Your personal allowance reduces by £1 for every £2 over this threshold, meaning at £125,140+, you lose it completely.
National Insurance Contributions (NICs)
Unlike employees, sole traders pay two types of National Insurance:
✔️ Class 4 NICs (based on profits)
- 6% on profits between £12,570 – £50,270
- 2% on profits over £50,270
✔️ Class 2 NICs (to qualify for state benefits)
- If profits are above £6,725 (2024/25) or £6,845 (2025/26), you automatically earn NI credits toward your State Pension.
- If profits are below the threshold, you can voluntarily pay £3.45 per week (£3.50 from 2025/26) to secure your State Pension eligibility—a much cheaper option than Class 3 voluntary contributions.
Tax Deadlines
- Your Self Assessment tax return must be filed by 31 January after the end of the tax year.
- Tax and Class 4 NIC payments are also due by 31 January, with additional payments on account required if your tax bill is over £1,000.
Do You Need to Register for VAT?
VAT registration isn’t mandatory unless your VATable turnover exceeds £90,000 in the past 12 months or is expected to exceed this in the next 30 days. However, some businesses choose to register voluntarily if they want to reclaim VAT on expenses.
Keeping Your Business Records Organised
Running a business means keeping clear financial records. Here are a few key things to stay on top of:
- Track all income and expenses – Keep digital or physical records to calculate your taxable profits accurately.
- Keep invoices and receipts – HMRC may ask for proof of business transactions.
- Use a separate business bank account – This helps avoid mixing personal and business expenses.
Thinking About Going Sole Trader? Let’s Talk!
Starting a business is exciting, but getting the tax and legal setup right is crucial for long-term success.
Not sure if being a sole trader is the best option for you? Get in touch with Jon and the team today—we’ll help you understand your options, stay compliant, and minimise tax wherever possible!
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Any questions?
If you’d like a meeting or a video call to discuss this, please get in touch with your favourite Liverpool accountant
- You can ring us on 0151 380 8080
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