Self employment

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Self-employment: setting up as a sole trader

Setting up as a sole trader is easy, and a good option if you’re starting out in private practice.

You can start seeing your first clients whenever you choose - all you need to do is let HM Revenue & Customs (HMRC) know that you’re self-employed, by registering for Self-Assessment.

Here’s why being a sole trader is so popular...

  • you don’t need to pay any registration fees
  • you can trade under your own name or a trading name
  • you own 100 per cent of your business
  • you’re completely free to make your own decisions
  • you don’t have to get a business bank account if you don’t want to
  • you keep all the profits (less tax, of course!)
  • you generally only have to complete one tax return form
  • you don’t need to provide specific accounting records
  • you can deduct your business expenses, reducing the tax you owe
  • you can employ people and still be a sole trader


But it’s not all good news...

Unlimited liability - what it means

As a sole trader, you are liable for all of your debts, whether they’re personal or business. If you can’t afford to pay them, you could be forced to sell assets such as your home to release finance.

Before you decide whether to set up as a sole trader, think about your private practice start-up costs. Can you afford them? Will you need to get a bank loan - and will you easily be able to afford the repayments? What about your running costs?

If you feel you cannot afford the risk, you should consider setting up as a private limited company.

Sole trader finances - your questions answered

Will I need a separate bank account?
It’s not compulsory. You can use your own personal bank account if you wish (check the terms and conditions). However, it’s a good idea to have a separate business account, because it will help you keep track of your income and outgoings. It will also look more professional, because your business account can be under your trading name (if you have one) rather than your personal name. Read more about business bank accounts here.

Will I need to register for VAT?
Probably not, especially when starting out. You only need to register for VAT if your turnover reaches £82,000 (in 2015/16). Find out more about VAT.

Will I need to pay business (Corporation) tax?
No. If you’re a sole trader, you only need to pay income tax and National Insurance, as you would if you were employed. The only difference is that you take into account the earnings and expenses of your business. You may also need to pay Capital Gains Tax, which is a tax on any gains that you make by selling or disposing of assets. Find out more about tax returns here.

So will I pay less tax than if I set up a limited company?
Not necessarily. Have a look at our limited company article to find out more.

How do I pay my Income Tax and National Insurance?
You will be sent a reminder by HMRC (usually in April) asking you to fill in a Self-Assessment tax return every year. You’ll need to pay Income Tax, Class 2 National Insurance and Class 4 National Insurance. The amounts to be paid will be based on the profit that you declare on the Self-Assessment tax return, and HMRC will work out the figure for you (aren’t they kind!). They’ll also tell you when you need to pay.

What if I’m employed as well as being self-employed?
That’s fine. You’ll pay Income Tax and Class 1 National Insurance contributions through PAYE, then Income Tax, Class 2 and Class 4 NICs on your self-employed earnings. When you fill in your Self-Assessment form, you will need to complete separate ’Employment’ pages to tell HMRC about your earnings from employment and the tax that has been deducted through PAYE. Make sure you keep your pay slips! You should also let your employer know that you are self-employed.

What sorts of financial business records do I need to keep?
As a sole trader, financial record-keeping is fairly simple. You should keep a record of all your invoices and receipts, as well as all your expenses. More on that here.

If I set up as a sole trader, can I become a limited company or partnership later?
Absolutely. The procedure is quite straightforward. Before you decide to become a sole trader, have a look at our articles on limited companies and partnerships.

Do sole traders get audited by HMRC?
It’s very rare, but there is always a chance that HMRC will carry out an investigation into your business and will ask to see your accounts.

Take action - how to register for Self-Assessment

You don’t need to do this immediately, but the sooner the better, and by 5 October after the end of the tax year for which you need a tax return (the tax year runs from 6 April to 5 April). 

Don’t leave it until the last minute, as you may get caught out. If you delay past the deadline by more than 3 months you will receive a fine of £100. However, this penalty will be cancelled if you can demonstrate that for the first tax year (that is up to next April 5 after registering), your profits will be below the Class 2 NI threshold of £5,965.

Visit the HMRC website at to get started. You’ll need your National Insurance number. If you need any help or advice, don’t be scared of calling HMRC or your local tax office - they can be very helpful.