How to Set Up as a Sole Trader in HMRC

Working for yourself has never been more popular than in modern times. More and more people seek out an income that allows them to manage their own time be flexible with their working weeks while also allowing them to pursue things they are passionate about.

woman searching internet

The rise of computer software that eases the transition into self-employment has only encouraged more people to take the plunge into the gig economy, and websites that connect freelancers with temporary employers complete the cycle.

However, one thing that can trip people up is setting themselves up to work legally as a sole trader. In this guide, we’re going to explore everything you need to know about setting yourself up as a sole trader with HMRC, the steps required and any other information that may be beneficial to know.

What is a Sole Trader?

A sole trader is defined as an individual that is the sole owner of a business and therefore benefits from total control over its running. Interestingly, this is the most common method of business ownership in the UK.

Many people will use sole tradership to test the market they wish to delve into before investing more money in a larger scale operation. However, in recent years, sole tradership offers people to become self-employed long-term.

It’s important to note that when it comes to sole tradership, the law does not differentiate between the business and the owner, thus allowing for unlimited liability to the owner.

This means that with sole tradership, your personal wealth is under threat in the event of the business failing and owing money.

However, businesses of this size rarely have large overheads and heavy credit. Usually, a sole trading business will be small in size, with few to no employees and a low turnover.

Most sole trading businesses are in the service sector, with occupations like plumbers, hairdressers, photographers and designers being common.

Setting Up as Sole Trader in HMRC

So, that’s what a sole trader is, but how do you set yourself up as a sole trader?

woman using computer

Ultimately, setting yourself up as a sole trader is for the tracking of tax obligations and payments through your end of year self-assessment returns.

So first, you need to register yourself as a sole trader on HMRC online with a new business name. There are a couple of requirements for your business name, and they are as follows:

  • You may use your own name
  • You may not use any offensive words or remarks
  • You may not include the word limited or anything alluding to it
  • You may not use any existing trademarks

An important aspect of becoming a sole trader is deciding whether you would benefit from an accountant that can advise you on the records that you must keep within the realms of your business; usually, an accountant is beneficial to you.

You must also become VAT-registered if you have a turnover of over £85,000 per year.

Advantages and Disadvantages of Becoming a Sole Trader vs A Limited Company

Fewer Admin Tasks

When you start your company as a limited company, there are many more administrative tasks to contend with each year. These include corporation tax, yearly accounts, filing reports with Companies House and many other admin tasks.

Sole traders still need to declare their income and expenditure, but with no need to worry about shareholders and shares and IR35.

Fewer Costs

When you become a limited company, you will almost definitely require an accountant, a solicitor and a formation agent. While you are free to do so without them, it will be very complicated to do without them. There is also a registration fee to pay with companies house to register a limited company.

counting coins

More Privacy

When you start a limited company, all company details, including personal information about the directors and accounts, will be available to all on the Companies House site. However, you are protected from this as a sole trader due to the taxpayer confidentiality regulations.


Ultimately, not everyone is suited for sole tradership over a limited company, and there are some disadvantages. For one, unlimited liability could be an issue if you plan to operate with large amounts of credit and if you’re in a volatile industry.

This means that your assets are not safe from the pitfalls of the business should anything go awry. It can also pay off to be a limited company when retaining as much tax as possible within the financial laws.

However, if you are a one-person band, a freelancer or simply just a tiny company, regardless of turnover, sole tradership is usually better in the long run.

One of the biggest reasons people don’t pursue a career in freelancing or as a one-person company is the confusion around registration, tax, remaining compliant with laws and other clerical issues. But this doesn’t need to be the case with so many resources like this one available online.

Everything can be processed and signed up for on the HMRC website, which is easy to navigate, and if you take your time when going through the application process, you can take each step at a time and understand it as you go.

HMRC has worked hard in recent years, due to the boom in the gig economy, to improve the amount of explanation that is given throughout the sole tradership application, with less technical jargon used and a more user-friendly experience through the website.

So there is no need to be hesitant to take the plunge into the world of self-employment due to worry or confusion around setting up.

The most important thing to remember is to complete a self-assessment every year, which an accountant can help you with. Many people avoid paying accountants to remove unnecessary costs, but more times than now, an accountant saves you more money in the long term when it comes to claiming expenses for your business.

Check out more of our guides for information about starting businesses, applying for certifications and many other topics!


Last updated by MyJobQuote on 29th March 2023.
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