In the UK, a sole trader is a self-employed individual who owns and operates their business as a single entity. There are no legal distinctions between the individual and their business.
When you register as a sole trader in the UK, you will be required to register a Self Assessment tax return, which is how you notify HMRC that you are self employed. All sole traders will be required to fill one out every year, regardless of how much money you earned.
You can consult our guide on whether to be a sole trader or limited company, as each one has advantages and disadvantages.
The steps to registering as a sole trader in the UK are as follows:
Notify HMRC
Through your government gateway account, you will need to inform HM Revenue and Customs (HMRC) that you are self-employed. Create an account if you do not have one, or submit a paper form like the SA1 or CWF1 forms.
Register for Self Assessment
You will need to fill out details including your name, date of birth, National Insurance number, address, business start date and business type.
It’s worth noting that HMRC has certain rules over business names, to avoid misleading customers with words like ‘limited’.
1. Note your Unique Taxpayer Reference (UTR)
Received digitally and by post, your UTR number is a 10-digit code required for filling out tax returns.
2. Complete your Self Assessment
Every year, you will need to complete a Self Assessment tax return in order to work out what tax you’ll pay on your income that year.
Key deadlines for Self Assessment
Self Assessment registration should be completed by the 5th of October of your second tax year if your income has exceeded £1,000.
Your Self-Assessment tax return needs to be completed by the 31st of January, following the end of the tax year.
How much does it cost to register as a sole trader?
Registration is free of charge, and you do not need to register with Companies House if you are a sole trader.
Even before registering, it is advisable to keep good records of income and expenses, to make the process easier once it’s time to file your tax return.
How much can I earn as a sole trader before paying tax in the UK?
As a sole trader in the UK, for the 2024/25 tax year, you can earn up to £12,570 before paying tax. This is the same as the standard personal allowance.
Above this amount, you will be taxed as follows:
- 20% (Basic Rate): For income between £12,571 and £50,270
- 40% (Higher Rate): For income between £50,271 and £125,140
- 45% (Additional Rate): For income above £125,140
Furthermore, if your income exceeds £100,000, your personal allowance is reduced by £1 for every £2 of income over this threshold. Your entire allowance is lost once you exceed £125,140.
What are the benefits of registering as a sole trader?
For small businesses and individuals, registering as a sole trader is particularly appealing. There are numerous benefits to registering as a sole trader in the UK, including:
Simplicity & low costs
As opposed to registering as a company, setting up as a sole trader is straightforward, with minimal legal and administrative strain. The main administrative procedures are contained within the Self Assessment process with HMRC. The lack of startup or operational cost is attractive for smaller traders. To register for Companies House, for example, there are fees in addition to more complex accounting requirements.
Full autonomy
As sole traders aren’t needing to consult partners or shareholders before making decisions, they can typically move faster in response to market changes, and have complete control over business operations. Profits after tax also belong only to the sole trader, avoiding obligations to sharing profits with stakeholders, for example. This flexibility offers sole traders the ability to easily make adjustments to business operations, like changing their products and services, pricing strategies or working hours in order to suit their needs or respond to the demands of the market.
Privacy
Limited companies require directors to publish financial information and personal details publicly. As a sole trader, you can operate with greater confidentiality.
Easier tax returns
The ability to offset business expenses against taxable income, as well as the overall process of reporting business income through a personal tax return is far simpler than the complexities of filing corporate tax.
What are the disadvantages of being a sole trader?
Some disadvantages of being a sole trader in the UK include:
Unlimited liability
All business debts and liabilities are the sole responsibility of the individual. If a business fails, personal assets are at risk when covering any outstanding debts.
Lack of credibility
For some, a limited company implies a greater level of stability in professionalism. While this is just a perception, it could result in lost business opportunities for sole traders. Equally, it may lead to difficulties in securing funding as banks and investors may view sole traders as higher risk. The lack of share offerings may limit growth, acting as a barrier to raising capital.
Tax limitations
As a tradeoff for a simpler taxation system, sole traders cannot access tax planning options offered to limited companies, like drawing dividends – taxed at a lower rate than income.
Individual responsibility
With the clue in the name, a sole trader is solely responsible for all aspects of a business. This can lead to difficulties in taking time off, long working hours and other issues when looking to transfer ownership.
How can sole traders access funding?
There are various options for funding for sole traders. However, while it is still possible to receive funding as a sole trader, your options will be restricted compared to that of a limited company.
Business loans
Without a requirement for collateral, unsecured business loans are accessible for sole traders without requiring significant assets. Rise Funding offers both long-term and short-term business loans. You can see all our business loans on our website.
Invoice financing
Invoice finance is where sole traders can borrow against unpaid invoices – Rise Funding can pay anything from 75% to 95% of the invoice value. This is particularly suited to businesses with regular invoicing cycles.
Merchant Cash Advances (MCA)
For those businesses with steady card sales, a merchant cash advance is an upfront sum that is repaid by taking a percentage of daily card transactions. While this offers great flexibility, it may not be suitable for all businesses.
Conclusion
Registering as a sole trader in the UK is an accessible way to operate your business, offering simplicity, autonomy and flexibility. However, it is important to be aware of year tax deadlines, for example, and to maintain accurate financial records.
If you are a sole trader looking to fund your business, Rise Funding can help you find the best option for your business. Whether it’s a business loan, invoice financing, a merchant cash advance or others, we’re here to help you make a decision with confidence.
Contact us via the form below, or get an instant business quote through our online questionnaire.
