Guide to Setting up as a Sole Trader

Quick summary: A sole trader is a self-employed individual who owns and runs a business personally. In the UK, you must register with HMRC for Self Assessment, pay Income Tax and National Insurance on your profits, and you're personally responsible for any business debts. It's the simplest way to start a business in the UK.

Starting a business can feel overwhelming, especially when you’re trying to decide which business structure is right for you.

For many UK entrepreneurs, becoming a sole trader is the simplest way to get started.

It’s quick to set up, easy to manage, and popular with freelancers, consultants, tradespeople, and small business owners across the UK. But before you register, it’s important to understand what a sole trader is, how the structure works, and the responsibilities that come with it.

This guide explains everything you need to know about sole traders in the UK, including the pros and cons, how to register, tax responsibilities, and how a sole trader compares with other business structures.

What is a sole trader?

The official sole trader definition refers to a self-employed person who owns and runs a business alone.

In simple terms, there’s no legal difference between the business and the owner. You keep all the profits after tax, but you’re also personally responsible for any debts or losses the business may have.

This is the most common business structure in the UK because it’s straightforward and relatively easy to manage. As a sole trader, you can:

Work for yourself
Sell products or services
Hire staff if needed
Keep business profits after tax
Make business decisions independently

Common sole trader businesses include:

Freelancers
Consultants
Electricians
Plumbers
Designers
Personal trainers
Online sellers
Tutors
Photographers

Many people start as sole traders before later becoming a limited company as the business grows.

Sole trader vs. self-employed: What’s the difference?

People often use “sole trader” and “self-employed” interchangeably, but they aren’t exactly the same thing.

Self-employed is a tax status. If you’re self-employed, it means you work for yourself rather than an employer.

Sole trader is a business structure. A sole trader is one specific way of operating as a self-employed person. This means:

All sole traders are self-employed
Not all self-employed people are sole traders

For example, someone could be self-employed but operate through a limited company instead.

The pros and cons of being a sole trader

Becoming a sole trader is a popular choice for many people in the UK, but it’s worth considering the potential pitfalls too. Here are some of the key advantages and disadvantages of being a sole trader compared to other traditional business structures.

Advantages

Simple to set up

Setting up as a sole trader is the most hassle-free way of starting a business. The registration process is quick and easy – just register online with HMRC quickly and start trading almost immediately. Plus, there’s no cost involved, unlike setting up a limited company.

Full control

As the sole owner, you make all decisions about how the business operates – from pricing and services to long-term direction. You don’t need approval from directors, shareholders, or investors, allowing you to act quickly when new opportunities arise.

Keep your profits

After paying tax, the remaining profits belong entirely to you. As a sole trader, you don’t need to share earnings with shareholders or directors, which means you benefit directly from your business’s success.

Less admin

Sole traders typically face fewer reporting and filing requirements than limited companies. Many also use a personal bank account for business transactions, reducing administrative workload.

Greater privacy

Unlike limited companies, sole traders don’t need to publish financial information on Companies House. This allows you to keep business details private, which can be useful in the early stages before pitching it to investors or potentially transitioning to a limited company at a later date.

Disadvantages

Unlimited liability

This is one of the biggest risks. Whilst this arrangement allows a business owner to keep hold of their company’s profits (after tax), it also makes them personally liable for the losses, plus any debt owed to suppliers. Because there’s no legal separation between you and the business, you’re treated as one and the same – you’re personally responsible for business debts.

That means personal assets – such as savings or property – could potentially be at risk to cover the cost if the business runs into financial trouble.

Harder to raise large-scale funding

Some lenders and investors may prefer working with limited companies, especially for larger funding amounts.

Because their accounts aren’t disclosed publicly, sole traders can often struggle to raise additional funding to grow their business. Most lenders like to see evidence of a healthy revenue stream, which will give them confidence in a company’s ability to repay a loan.

However, if a sole trader’s business transactions are made through their personal bank account, it can be difficult to get an accurate picture of a company’s performance.

That being said, there are a number of alternative lenders, like Fleximize, offering sole trader loans of over £25,000. As long as a sole trader can demonstrate their ability to meet the cost of repayments, and is willing to offer a personal guarantee on the funding, it might stand a chance of being approved for a loan.

Tax limitations as profits grow

As your earnings increase, operating as a limited company may become more tax-efficient.

Difficult to take time off

With nobody else to pick up the slack, it can be tricky for sole traders to find time for a holiday, or take a day off when they’re ill.

Doing the job of five or six people can also mean working long hours on a regular basis, potentially at the expense of time with loved ones. For this reason, many business owners choose to set up with a partner, or hire a part-time accountant to take care of the finances.

You carry the responsibility

As a sole trader, you’re responsible for:

Taxes
Record keeping
Invoicing
Expenses
Legal compliance

What does unlimited liability mean?

Unlimited liability means there’s no legal distinction between you and your business. If the business can’t pay its debts, creditors may pursue you personally.

For example, this could affect:

Personal savings
Property ownership
Other personal assets

This is one of the main differences between a sole trader and a limited company, where liability is usually limited to the company itself. As a result, some sole traders choose to take out business insurance or later transition to a limited company structure as they grow.

Five things you need to do before registering as a sole trader

Before setting up as a sole trader, it’s worth preparing a few essentials.

1. Decide on your business idea

Be clear about what products or services you’ll offer and who your target customers are.

2. Choose a sole trader business name

You can trade under your own name or create a business name.

However, there are some restrictions:

You can’t use “Ltd” or “Limited”
The name can’t be offensive or misleading
You shouldn’t copy existing trademarks

3. Open a business bank account

You’re not legally required to have a separate account as a sole trader, but it makes bookkeeping much easier.

4. Understand your tax responsibilities

You’ll usually need to pay:

Income Tax
National Insurance contributions

5. Start keeping records early

Good record keeping will save time later and help when completing tax returns.

How to set up as a sole trader in the UK

Setting up as a sole trader is relatively straightforward.

Step 1: Register for Self Assessment

If you earn more than £1,000 from self-employment during a tax year, you must register with HMRC for Self Assessment by 5th October following the end of the tax year in which you started trading.

You’ll need:

Your personal details
National Insurance number
Business start date
Business activity description

Once registered, HMRC will send you a Unique Taxpayer Reference (UTR).

Step 2: Keep financial records

You’ll need to track:

Income
Expenses
Invoices
Receipts
Mileage
Bank statements

Many sole traders use accounting software to make this easier.

Step 3: Submit annual tax returns

Sole traders must complete a Self Assessment tax return each year.

This tells HMRC how much profit you made and how much tax you owe.

Step 4: Pay sole trader tax and National Insurance

As a sole trader, you pay Income Tax on your profits (not your total revenue), along with National Insurance contributions.

For the 2026/27 tax year, Income Tax bands in England, Wales and Northern Ireland are:

Personal Allowance: £0–£12,570: 0%
Basic rate: £12,571–£50,270: 20%
Higher rate: £50,271–£125,140: 40%
Additional rate: £125,140+: 45%

(Note: personal allowance reduces once income exceeds £100,000, reaching £0 at £125,140.)

In addition, most sole traders pay:

Class 2 National Insurance (if profits exceed the threshold)
Class 4 National Insurance on profits over £12,570

For example, if you earn £40,000 in profit, the first £12,570 is tax-free, and the remaining £27,430 is taxed at 20%.

You’ll also pay Class 4 National Insurance on profits above the threshold.

Your total tax bill will depend on your exact earnings and any allowable expenses you claim.

Tax rates can change, so it’s always worth checking the latest Income Tax bands and thresholds on the official GOV.UK website.

If your tax bill exceeds £1,000, you may need to make payments on account, advance payments towards your next tax bill, usually due in January and July.

Step 5: Consider insurance and licences

Depending on your industry, you may need:

Public liability insurance
Professional indemnity insurance
Industry licences or certifications

Is being a sole trader right for you?

It depends on what you need from your business.

A sole trader structure is likely a good fit if:

You want a simple, low-cost setup
You're starting small or freelancing
You want full control over decisions

It may be less suitable if:

You want to protect your personal assets from business risk
You're planning to scale quickly or take on significant debt
You need to raise external investment

Many businesses start as sole traders and later incorporate once they grow.

Sole trader vs. limited company

One of the biggest decisions new entrepreneurs face is whether to operate as a sole trader or limited company.

Feature	Sole trader	Limited company
Legal structure	Owner and business are the same	Separate legal entity
Liability	Unlimited personal liability	Limited liability
Setup	Simple	More complex
Tax	Income Tax on profits	Corporation Tax
Administration	Lower	Higher
Public records	Private	Filed publicly
Ownership	One individual	Shareholders/directors
Funding opportunities	Sometimes more limited	Often broader access

Can a sole trader have employees?

Yes. Although sole traders operate individually, they can still hire staff if needed. If you employ people, you’ll usually need to:

Register as an employer with HMRC
Operate PAYE payroll
Meet employment law responsibilities

However, many sole traders remain solo businesses, especially in the early stages.

Do sole traders need to register for VAT?

You must usually register for VAT if your taxable turnover exceeds the UK VAT threshold.

Some businesses also register voluntarily before reaching the threshold, particularly if they work with VAT-registered clients.

VAT registration means you’ll need to:

Charge VAT on eligible sales
Submit VAT returns
Keep VAT records

Common expenses sole traders can claim

Sole traders may be able to reduce their taxable profit by claiming allowable business expenses. Examples include:

Office supplies
Travel costs
Marketing expenses
Software subscriptions
Business insurance
Professional fees
Phone and internet costs

Keeping organised records is important for accurate tax reporting.

Scaling your business: Can a sole trader get a business loan?

Yes. Sole traders can apply for business finance just like limited companies. Funding can help sole trader businesses:

Buy equipment
Manage cash flow
Invest in marketing
Hire staff
Expand operations
Purchase stock

Some lenders may assess:

Trading history
Revenue
Affordability
Credit profile

Our expert underwriters will always look at the bigger picture when assessing your application. If you’re demonstrating good past and current business profitability and your funding requirements match your circumstances, then you stand a good chance of getting funding.

Here are our eligibility criteria:

You're applying for a minimum of £25k
You’ve been trading for at least six months
Your business is based in England, Wales, Northern Ireland and Scotland
Have a minimum monthly turnover of £12,500

Alternative lenders can sometimes offer faster decisions and more flexible criteria than traditional banks. At Fleximize, we support sole trader businesses with flexible funding designed around growth. If you’re exploring funding options, it’s worth comparing providers to find the right fit for your business. Apply online today.

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