Sole traders comprised nearly 60% of the UK private business sector in 2020. But what is a sole trader, and why register as one?

Registering as a sole trader has many benefits as it allows you to exercise certain legal and financial arrangements that are different from other business structures (like limited companies or business partnerships).

If you’re not sure whether registering as a sole trader is right for you or your business, here’s a step-by-step guide with things to consider. 

In this article, we’ll discuss: 

  • What is a sole trader?
  • Is being a sole trader right for you?
  • What you’ll need to decide
  • What you’ll need to declare
  • What you’ll need to keep records of

What is a sole trader?

A sole trader is someone who is self-employed and runs a business.

If you’ve started working for yourself, you’re automatically considered as a sole trader by HMRC (HM Revenue & Customs) –– even if you haven’t registered as one yet.

HMRC may also refer to you as a ‘sole proprietor’ or your business as a ‘sole proprietorship’, but they each refer to the same arrangement whereby you work for yourself. To keep things simple, we’ll be using ‘sole trader’ for the remainder of the article but keep these terms in mind as they’ll still apply to you if you become one.

As your business expands, you must register if, as a sole trader, any one of the following applies:

  • You earn more than £1,000 from your self-employment between tax years.
  • You need to prove you’re self-employed (for example, to qualify for certain benefit support).
  • You want to make voluntary Class 2 National Insurance payments to help you qualify for other benefits.

Is being a sole trader right for you?

Sole traders are allowed to keep all the profits they’ve earned after taxes but are also personally responsible for any debts their business undertakes. 

Because your personal and professional finances are intertwined as a sole trader, you’ll also be responsible for providing any tools or equipment you need to run your business. You can expense these in your accounting, but only for the proportion of usage that is for your business. For example, if you buy a laptop to stream films, buy clothes, and manage spreadsheets for your business, you can only expense the laptop to cover the usage directly linked to running your business (managing spreadsheets). 

Importantly, claiming expenses as a sole trader is different from other business types where any tools or equipment belong entirely to the business and not you. If you run a limited company, personal usage of company property is treated differently by HMRC. 

Expensing practises is just one area where the various UK business structures differ. Other types you can choose include registering as a limited company or with any business partners you have or are looking to invite. Some business owners find having more defined legal and financial separation useful. Others find being a sole trader less hassle as it generally involves less administration. For example, sole traders don’t have to disclose ownership structures or share values.

Whether you register as a sole trader or otherwise has implications on how you pay tax, find funding and operate. If you’d like more information on what business arrangement might be best for your business, read our guide, Sole Trader or Limited Company: How to Set Up Your Business. Additionally, the UK government offers support via its Business Support Helpline to help you decide. If your business is at an earlier stage, registering as a sole trader may be better for you in the short term.

What you’ll need to decide before setting up as a sole trader

You’ll need to decide on a trading name to use. As long as it’s not rude or offensive, your business name can be one you’ve chosen or your own name. Importantly, your trading name must not infringe on existing trademarks. You can protect yourself by finding out which names you’d like to use are already taken using this online tool. If you have a unique name that you’d like to use, you can register to protect it.

Because you are not a limited company, your trading name cannot include terms like ‘limited’, ‘Ltd’, ‘public limited company’ or ‘plc’. 

As you start trading, you’ll also need to decide how to record your transactions. Traditionally, businesses record invoices and report their income/expenses to reflect invoicing paperwork. More common in the retail industry, cash basis accounting (where transactions are recorded on the dates they actually happen) might be more appropriate for your business. Find out more about accounting methods in our article How To Register As A Sole Trader.

What you’ll need to declare

As you trade, you must include your name (or business name if you have one) on the paperwork you use as part of your business. This can include things like invoices, letters or order forms. While this helps you keep track of your business’ paper trail, it also makes your business more transparent to your customers and during any routine audits by HMRC.

As a sole trader, you’ll also need to provide HMRC with a self-assessment form detailing your taxes owed each year. At Countingup, we know running a business as a sole trader can be hectic. That’s why we’ve made your financial admin easier. 

Read on to find out how we can help you track your trading, so you have complete confidence in your tax compliance each year.

Finally, if your turnover is over £85,000, you must register for VAT. Some sole traders voluntarily register below this threshold if it suits their business or appears more reputable to customers. Depending on your industry, this may be something you can consider. However, as it relies on your turnover, it’s not compulsory until this threshold.

What you’ll need to keep records of

Like any other business, sole traders must keep records of their income and expenses in order to calculate their tax returns. However, because the relationship between your business and your personal finances is closer as a sole trader, you’ll also need to keep records of your personal income to make sure your calculations are reliable.

Having a bank account separate from your personal finances can help you have a clearer picture of your finances when it comes to your bookkeeping and tax filing. 

Managing your business accounting is easy with Countingup

Countingup is the business current account that automates bookkeeping. 

With your business current account, accountancy software and tax filing software in one app, not only can you have complete confidence in your legal compliance, you can spend more time running your business.

As you trade, Countingup offers reminders to capture your receipts digitally, the ability to create invoices instantly, and gain real-time insights into your business performance –– helping you keep on top of your finances from day one. Find out more here

We want to support and empower new entrepreneurs entering the world of business. If you’re ready to register yourself as a sole trader, read more about the process in our article How to register as a sole trader.