How to Set Up a Sole Trader: HMRC Registration, Tax, and VAT

Setting up as a sole trader in the UK is mostly one task: tell HMRC you’re self-employed by registering for Self Assessment. There’s no formation document, no fee, and no company to file at Companies House. You need to register by 5 October following the end of the tax year in which you started trading, and once you’re in the system you’re responsible for your own income tax, National Insurance, and record keeping.¹

Do You Actually Need to Register

Not every scrap of self-employed income triggers a registration duty. The UK gives you a £1,000 trading allowance: if your total gross trading income for the tax year is £1,000 or less, you generally don’t need to tell HMRC or file a return.² Casual babysitting, occasional craft sales, weekend gardening jobs — these often stay under the line.

Once your gross trading income passes £1,000, you must register. You also need to register if you want to claim the trading allowance as a deduction rather than actual expenses, or if you need to prove your self-employment for something else, such as a benefits claim. Registering early costs nothing and heads off penalties later.

Choosing a Business Name

You can trade under your own legal name or pick a business name. Many sole traders use both, styling themselves “Jane Smith trading as Bright Ideas Design.” If you use a business name, your own name has to appear alongside it on invoices and official letters.³

Some words are off-limits. Your business name can’t include “limited,” “Ltd,” “LLP,” or “plc,” which are reserved for incorporated entities.³ It also can’t be offensive or so similar to an existing trademark that it causes confusion. Search the Intellectual Property Office’s trademark register before you commit. Rebranding after you’ve printed cards and built a client list is expensive.

What to Have Ready Before You Register

Gather the following before you sit down, so you can finish in one go:

Your National Insurance number. If you don’t have one, apply for it first.¹
Full legal name and date of birth.
Your residential address and business address, which for many home-based sole traders are the same.
A contact telephone number.
The exact date you started trading, not the date you’re registering. HMRC uses this to work out which tax year your first return covers.
A short description of what you do, such as “freelance graphic design” or “plumbing services.”

Getting the start date right matters more than most people realise. Put down a date that’s too late and you risk underreporting income from your earliest trading period.

How to Register with HMRC

Registration runs through HMRC’s online Self Assessment tool. You’ll need a Government Gateway account to sign in, which you can create during the process if you don’t already have one. The tool asks about your circumstances and routes you to the right form.¹

The legal deadline is 5 October following the end of the tax year in which you started trading.¹ If you began trading between 6 April 2025 and 5 April 2026, you must register by 5 October 2026. Missing the deadline can trigger a penalty if tax is owed.⁴

Getting Your UTR

Once HMRC processes your registration, they post you a ten-digit Unique Taxpayer Reference. If you registered online, it usually arrives within 5 to 10 working days. You’ll use the UTR on every future tax return and in any correspondence with HMRC, so file it somewhere you can find again.⁴ Through your online tax account you can choose to receive HMRC communications digitally or by post.

Income Tax on Your Profits

Sole traders pay income tax on trading profits, not turnover. Profit is what’s left after you deduct allowable business expenses. That profit is taxed at the same rates as employment income.

For the 2025-26 tax year:⁵

Personal allowance: no tax on the first £12,570.
Basic rate of 20% on income from £12,571 to £50,270.
Higher rate of 40% on income from £50,271 to £125,140.
Additional rate of 45% on income above £125,140.

The bands apply to your total taxable income, not just your sole trader profits. If you also have a salary from employment, that income uses part of the bands first and your trading profits sit on top.

National Insurance

Self-employed sole traders pay Class 4 National Insurance on profits above the lower profits limit, collected through Self Assessment alongside income tax. Class 2 contributions were effectively made voluntary from April 2024, though you can still pay them voluntarily to protect your State Pension entitlement.

Payments on Account

If your Self Assessment tax bill reaches £1,000 or more, HMRC will usually require payments on account for the following year. Each payment is half of your previous year’s bill, due on 31 January and 31 July.⁶

This catches new sole traders out. In your second year of trading you could face three payments close together: the balancing payment for the previous year plus the first payment on account for the current year, both due on 31 January, then the second payment on account on 31 July.⁶ Setting aside roughly 25 to 30 percent of profit as it comes in is a common rule of thumb.

You don’t need to make payments on account if your previous year’s tax bill was under £1,000, or if you paid more than 80 percent of what you owed through other means such as your PAYE tax code.⁶

When You Have to Register for VAT

If your taxable turnover exceeds £90,000 in any rolling twelve-month period, you must register for VAT.⁷ Turnover means gross sales, not profit. Once registered, you charge VAT on your goods or services, submit VAT returns (usually quarterly), and pay the VAT you’ve collected to HMRC.

You can also register voluntarily below the threshold. That can make sense if your customers are VAT-registered businesses that reclaim the VAT you charge and your own business incurs significant VAT on supplies and equipment. For sole traders selling mainly to consumers, voluntary registration usually just makes your prices less competitive.

Allowable Expenses and Records

HMRC lets you deduct costs incurred wholly and exclusively for your trade. The main categories:⁸

Office costs like stationery, phone bills, and software subscriptions.
Travel: fuel, parking, train and bus fares for business journeys, but not ordinary commuting.
Premises costs including heating, lighting, business rates, and rent for your workspace.
Stock and materials you buy to sell on or use in delivering your service.
Staff costs such as salaries and subcontractor fees.
Financial costs like business insurance and bank charges.
Advertising and marketing, including website costs, printed materials, and online ads.
Training that updates or maintains skills you already use in your business.

If you work from home you can claim a proportion of household costs such as heating and broadband. HMRC offers simplified flat rates, or you can calculate the actual business share. Keep the receipts. An expense without evidence is an expense HMRC can disallow.

You must keep records of all business income and expenses: sales invoices, purchase receipts, bank statements, and mileage logs if you claim travel. Digital or paper is fine as long as they’re accurate and complete. HMRC requires you to retain records for at least five years after the 31 January submission deadline of the relevant tax year. A return for the 2025-26 tax year filed by 31 January 2027 means keeping the records until at least the end of January 2032. For a very late return (more than four years past the deadline), you must keep the records for 15 months after submission.⁹

If records are lost, stolen, or destroyed, file your return using estimated or provisional figures and tell HMRC you’re doing so. Don’t use it as an excuse to skip filing.

Late Filing Penalties

Missing the 31 January deadline for your Self Assessment return triggers an automatic £100 penalty, even if you owe no tax.¹⁰ Daily penalties can kick in after three months, and further fixed penalties land at six and twelve months. Interest accrues on any unpaid tax from the due date. Your return for the 2025-26 tax year can be submitted from 6 April 2026, and there’s no reward for waiting until January.

Making Tax Digital from April 2026

A big change is coming. Under Making Tax Digital for Income Tax, sole traders and landlords with total qualifying income above £50,000 must, from April 2026, keep digital records using compatible software and send quarterly updates to HMRC instead of filing a single annual return. You’ll still submit a final tax return and pay any tax due by 31 January after the end of the tax year.¹¹

From April 2028 the threshold drops to £20,000, bringing many more sole traders into the system.¹² Even if you’re below the threshold now, adopting accounting software early makes the transition less painful.

The Liability Trade-Off

The simplicity of sole trading comes with unlimited personal liability. There’s no legal separation between you and the business. If it runs up debts it can’t pay, or someone brings a claim against you, your personal assets are exposed. That includes your savings, your car, and potentially your home.¹³

Business insurance helps. Public liability insurance covers claims from third parties for injury or property damage. Professional indemnity insurance covers claims arising from your advice or services. The right cover depends on the trade. If the liability exposure starts keeping you up at night, that’s usually the point where sole traders begin looking at whether a limited company structure would suit them better.

1
GOV.UK. Register as a Sole Trader
2
GOV.UK. Tax-Free Allowances on Property and Trading Income
3
GOV.UK. Become a Sole Trader – Choose Your Business Name
4
Low Incomes Tax Reform Group. Do You Need to Register for Self Assessment? Don’t Miss the Deadline of 5 October 2024
5
UK Parliament – House of Commons Library. Direct Taxes – Rates and Allowances for 2025/26
6
GOV.UK. Understand Your Self Assessment Tax Bill – Payments on Account
7
UK Parliament. Small Businesses – VAT Threshold
8
GOV.UK. Expenses if You’re Self-Employed – Overview
9
GOV.UK. Business Records if You’re Self-Employed – How Long to Keep Your Records
10
GOV.UK. Estimate Your Penalty for Late Self Assessment Tax Returns
11
GOV.UK. Making Tax Digital for Income Tax for Sole Traders and Landlords
12
GOV.UK. Making Tax Digital for Income Tax Self Assessment for Sole Traders and Landlords
13
GOV.UK. What a Sole Trader Is