What is a sole trader? How to register as self-employed

Sole traders are simply people who are self-employed. Whatever your industry, anyone can become self-employed and run a business without a team and as a single individual.

The term “sole trader” may conjure up some specific professions in the minds of most of us, including plumbers, electricians and more.

But while the term might be used in common parlance to refer to those who save us when our pipes burst or our fuses blow, there’s actually a legal definition of sole trader which covers people from across all sorts of different industries.

In this guide, we explain what makes a person a sole trader, what sort of obligations they’ll have to carry out and how to register with HMRC.

What’s the definition of a sole trader?

Put simply, a sole trader is anyone who runs their business by themselves, for profit. Anybody in any industry can register as self-employed.

Unlike a partnership (which is two or more individuals running a business) or a limited company (in which the owners are exempt from liability), sole traders work by themselves and generally run the business.

They are also directly responsible as individuals for any losses, claims or debts which arise as a result of their work.

What obligations do sole traders have?

A sole trader still needs to pay tax on the profits their business makes, and this is achieved via annual Self Assessment process. You can deduct many types of loss and expenditure from your profits to reduce your overall tax bill. You’re required to keep a record of your business expenses so that you can fill this out accurately and completely.

In addition to income taxes, those who are self-employed will be expected to pay Class 2 (weekly) and Class 4 (annual) National Insurance Contributions, so it’s important to budget well in advance and ensure you keep enough cash funds to meet these liabilities at the end of the tax year.

In common with partnerships and limited companies, sole traders are required to register for value-added tax (VAT) if their VAT-taxable turnover per year is £85,000 or more (2020/21).

If your turnover is under this threshold, there’s no obligation to register – but being registered means you can claim back the VAT you pay on purchases with other companies, so consult your accountant or tax adviser to double-check that this is the right move for you.

How do you register as self-employed?

You need to tell HMRC that you’re self-employed by registering for Self Assessment by 5th October in your business’s second tax year. If you don’t do this, you could risk a fine.

You can register as self-employed online. Even if you’ve sent a tax return into HMRC before, you’ll still need to do this.

The key piece of information you’ll receive after you do this is your 10-digit Unique Taxpayer Reference (UTR): you should keep this safe as you’ll need it when you pay future tax returns.

Registering online also means you get enrolled for Self Assessment online services simultaneously, so once your UTR has come through you’ll be able to start using the online portal right away.

How does becoming self-employed compare to forming a company?

A major reason why many people chose to become sole traders, rather than setting up a company, is because there’s less administration work involved, and you can start your business immediately.

The administrative burden is certainly less, although in reality an accountant can take care of these additional tasks should you wish to form a company.

If you are a sole trader, your personal and business affairs are treated as one entity for tax purposes, which is simpler than the limited company route, but also means you are personally liable for any business debts.

According to the latest business population estimates, self-employment remains by far the most popular way of setting up a business – in 2016 there were 3.3m sole traders, compared to 1.8m companies and 421,000 partnerships.