Eager to kickstart your business journey as a sole trader? Fantastic! Before you jump in, there are a few things you’ll need to know.
Starting out as a sole trader is the easiest way to go into business – but you might be wondering whether or not you should incorporate a private limited company. It’s a crucial decision, and one that requires a bit of thought.
If you decide to be a sole trader, great! We’ll talk you through how to register as one. Once that’s done, you’ll need to start sorting your tax obligations. Whether you’re setting up shop as a freelance copywriter, launching a catering service, or selling handmade jewellery at the local market, it’s important to be across everything you may owe to HMRC.
Got questions? We’ve got answers. Let’s help you get prepared for this exciting new journey!
What is a sole trader?
A sole trader is when you’re the sole owner and operator of your business. You have complete control, and make all the big decisions without having to share the driver’s seat with any partners or corporate directors.
But don’t be fooled by the word ‘sole’ – it just refers to who owns the business. It doesn’t mean you have to do everything alone! You can still hire employees or bring on contractors if you need extra hands, though many sole traders do run their business entirely by themselves.
You’ll also hear ‘sole trader’ and ‘self-employed’ used interchangeably, and when it comes to registering they’re pretty much the same thing – telling HMRC you’re working for yourself.
But there is a slight difference between them worth knowing: while all sole traders are self-employed, you can be self-employed without being a sole trader – if you’re in a business partnership, for example. In this scenario, you’d share decision-making for your business (so very much not ‘sole’).
You can also be a sole trader while being employed by another company. By day you may work a full-time job in IT, and by night you have a side hustle as a cupcake connoisseur, baking gourmet treats for local events. It all still counts!
Sole traders vs. companies: Which structure is best for you?
A lot of freelancers and contractors think about setting up a private limited company, but this route can sometimes be more hassle than it’s worth.
Here are some of the pros and cons of both options, to help you decide whether to register as a sole trader or register a limited company.
Sole Trader:
Pros:
Simple finances - you keep earnings directly without complex salary arrangements.
Low costs - registration is easy and free and it’s much cheaper to operate as a sole trader, so you save on legal and accounting fees.
Less complicated tax structure - you’re taxed only at your personal tax rate when running as a sole trader. This means you’re taxed once and only once, and don’t have to worry about company profits, paying yourself a wage, and director’s drawings.
You get all the benefits of trading as a company - you can have a business name, hire staff, and claim expenses – all without the compliance costs of being a limited company.
Cons:
Higher personal liability - your personal assets are at risk if business debts arise, though insurance can help mitigate this.
Limited access to funding - banks may see sole traders as risky, and investors are harder to attract.
You can’t co-own the business - want a partner? You’ll need a new structure.
Limited Company:
Pros:
Less liability (sometimes) - a company can protect you from personal liability, but it’s not guaranteed. Directors are not automatically protected, and you can be on the hook for debts, even if the company is deregistered or becomes insolvent.
Access to funding from banks may be smoother - banks tend to favour incorporated businesses for loans, especially for big expenses.
It’s easier to sell portions of the business - a company structure makes it simpler to sell shares and bring in partners.
Cons:
Separate finances - the company’s money isn’t yours directly. Paying yourself involves complex processes, and you’re taxed on both salary and dividends.
💡 In addition to the Personal Allowance of £12,570, you have a tax-free Dividend Allowance of £500. Anything beyond that is taxed at a set percentage, the rate of which depends on your Income Tax band. * *
Tax complexity - you have to pay taxes for both the company and yourself. It’s a whole lot more complicated than just doing your own personal taxes.
More expensive set-up and operating expense - setting up a company can be expensive. Think registration fees, annual filing, and compliance costs associated with things like dedicated business banking. All this to support a business structure you may not need.
Complicated accounts - you’ll likely need to hire a bookkeeper and an accountant to ensure you’re keeping meticulous records in case HMRC decides to audit you, and to ensure you’re compliant with the company’s regulatory body, Companies House.
Choosing between being a sole trader or forming a company depends on your business needs. If you’re not planning on hiring permanent staff, taking out large loans, or sharing ownership, becoming a sole trader might be your best bet.
Sole trader taxes
As mentioned earlier, as a sole trader, you get the profits from your business and simply pay tax at the individual tax rate. You also get to claim business expenses as tax deductions – whoo!
You’ll also need to start tracking and saving for things like:
- Income tax
- Expenses
- National Insurance Contributions
- If your profits are more than £12,570 a year, you’ll need to pay Class 4 self-employed contributions
- VAT (when you start making over £90,000 in self-employed income)
- Student loan repayments (if applicable)
- Private pension contributions (though this is optional)
…or, let Hnry do all this for you.
How to become a sole trader
Becoming a sole trader is all about starting your own business. So, you’ll need a service or product that people are willing to pay for, and a way to sell your wares (obviously).
You’ll also need to register as a sole trader with HMRC ifyour business income is more than £1,000 beforeallowable expenses in a tax year (6 April 2026 to 5 April 2027).
💡 Heads up: this threshold is changing, eventually. The government has announced plans to raise the Self Assessment reporting threshold for trading income from £1,000 to £3,000. There’s no start date yet – it’s expected some time before the end of this parliament. You’ll still have to report and pay any tax due on anything you earn over £1,000 and under £3,000, but that’d be through a new system, yet to be confirmed.
How to register as a sole trader
The good news is it’s free to register as a sole trader! Win!
Technically, what you’re actually doing is registering for Self Assessment with HMRC, but it’s basically the same thing. The deadline for doing this is 5 October each year, in order to file a Self Assessment for the tax year just completed.
You’ll also need to register for National Insurance Contributions as part of your Self Assessment registration.
The registration process
- First, you need to know your National Insurance number. Or if you don’t have one, apply for one.
- Log into your Government Gateway account, or create one if necessary.
- Add “Self Assessment” to your list of services, and complete the form to register. It asks you for details including your name, business name (if different), address, and what your business does.
- Once you’ve submitted the form, HMRC will send you a Unique Taxpayer Reference (UTR) through the post. You should only share this with your accountant (eg. Hnry!) or financial adviser. It’s not the same as a company registration number (CRN) – sole traders don’t receive the equivalent of a CRN.
- Keep your UTR somewhere safe. You’ll need it every time you file a Self Assessment, or authorise an accountant to act for you.
… and that’s it! Consider yourself registered!
After the end of each tax year, you’ll need to complete your Self Assessment through the Government Gateway online portal by the 31 January submission deadline. Unless you’re signed up to Making Tax Digital, that is.
What about Making Tax Digital?
If you’re self-employed, you’ve probably heard about Making Tax Digital (or MTD, as it’s often called). It’s one of the biggest changes to Self Assessment in decades, so here’s what you need to know.
Making Tax Digital is HMRC’s new system for sole traders (and landlords) to report their income and expenses. Think of it as Self Assessment’s digital-savvy younger sibling.
Instead of filing one big tax return at the end of the year, MTD asks you to keep digital records throughout the year and send quarterly updates to HMRC using MTD-compatible software (like Hnry!). You’ll still submit an annual return at the end of it all, but through that software rather than the usual HMRC Self Assessment portal.
Who needs to use Making Tax Digital?
MTD is being rolled out gradually, based on your qualifying income – that’s your total income from self-employment and property combined, before expenses.
- More than £50,000 in the 2024/25 tax year – you should already be using MTD, as it started in April 2026
- More than £30,000 in 2025/26 – you’ll need to start from April 2027
- More than £20,000 in 2026/27 – you’ll need to start from April 2028
Remember, it’s your qualifying income for previous tax years that counts, not what you’re currently earning. If you’re below the threshold, you generally won’t need to sign up at this point.
💡 Using Hnry? MTD is already sorted. We’re both your accountant and your software, so we keep your records digital and file your quarterly updates whenever they’re due, and we’re MTD-compliant! Learn more.
Hnry makes tax easy
And there you have it – a roadmap to kickstarting your journey as a sole trader.
But while you’re handling your business solo, you’re not alone with your taxes. Hnry is right there in your pocket whenever you need support.
We’re an award-winning app and tax service, specifically designed for sole traders. For just 1% +VAT of your self-employed income, capped at £600 +VAT a year, Hnry will calculate and pay all your taxes and whatnot for you, including:
- Income Tax
- National Insurance contributions
- Student loan repayments (if applicable)
- VAT (if registered)
- Private pension contributions (optional)
Our app models your income throughout the year and predicts your effective tax rate based on what you earn. We only ever deduct what we estimate you’ll owe, meaning you won’t get behind (or ahead!) on tax payments. You also won’t have to set money aside yourself – in fact, you’ll barely have to think about taxes at all.
Better still, using the Hnry platform costs less than using a traditional accountant, and our fee can be claimed as an allowable expense.
If that sounds good to you, join Hnry today and never think about tax again!