How to start a business as a sole trader

The idea of starting a business can be really daunting, especially in terms of your tax obligations. It can be hard to know where to start, but this blog post will talk you through the first few steps, to help you on your way.

What is a sole trader?

• A Sole trader is a single-owner business, but it doesn’t mean a single-worker business, you can hire staff, or sub-contractors to grow your business.

• A sole trader is ‘self-employed’. This means you must register with HM Revenue & Customs (HMRC) for self-employment as soon as you start trading.

• A sole trader is one person who is responsible for all a business, they are therefore entitled to all the risks and rewards this brings.

• In the eyes of the law, the business and the owner are the same. This is called “unlimited liability”. The owner is personally liable for the firm’s debts and may have to pay for losses made by the business out of their own pocket.

Where do I start?

Firstly, you will need to notify HMRC that you are starting a business;, this is super easy and can be done online. Your profits from your business will be subject to income tax and both Class 2 and 4 NIC. It is important to keep records of absolutely everything in terms of your purchase and sales transactions.

Registering and paying tax and NIC

Once you have notified HMRC that you have started a business, you will be registered for self-assessment and Class 2 NIC. Income tax is charged on the profits of the business for each tax year. Tax on trading profits is collected with other income tax charges through your by self-assessment tax return.

In terms of tax payments, it is so important to budget, since there can be a long delay between making profits and paying your tax. In the January following the end of your first tax year.

In 2026 , HMRC will be introducing a new quarterly filing system known as ‘Making Tax Digital’ for income tax, so it’s important to take advice now regarding how this may affect you in the future.

National Insurance contributions

There are two types of NIC that are payable by sole traders.

Class 2 – a small weekly amount paid once a year through your annual self-assessment tax return (currently £3.45 per week).

Class 4 – this is calculated according to the level of taxable profits that are paid through self-assessment. The rates are 9% for profits falling between a fixed lower and upper limit, and 2% on further profits.

VAT

VAT may not be an issue for many new businesses due to the high registration threshold. But it is a good idea to make yourself familiar with the threshold, because if you do not register when you should, HMRC will fine you.

The VAT threshold is currently set at £85,000. Registration is required if your sales for the previous 12 months are more than the threshold, and if there are reasonable grounds for believing that your sales in the next 30 days will be more than the threshold.

How do I calculate my profits and losses?

Profits and losses are calculated by adjusting the profit before tax figures in your accounts.

The starting point in calculating profits is usually the profit before tax figures shown in accounts are drawn up using standard accounting principles (known as GAAP). That figure is then subject to tax adjustments to ensure that only taxable receipts and allowable expenses are included, which ultimately leads

If you turnover for the year is under £150,000, smaller businesses can use the “cash basis” (money in, money out) as a simpler way to calculate profits.

Business expenses, what counts?

Common types would be rent for business working space (office), marketing, hiring vehicles or machinery, travel costs, legal fees, and employee costs.

I want to use my home as an office, what do I need to consider?

We have a whole blog post that covers this, which you can see here.

If this is your intent, a proportion of your home expenses may be deducted in calculating your profits. HMRC operates an optional 3 tier fixed rate deduction scheme which applies a sliding scale starting at £10 a month if you work 25 to 50 hours per month at home, £18 if you work between 51 and 100 hours, and £26 per month over 101 hours .

The monthly flat rate replaces any deduction for things such as heat, light, power, cleaning and water charges. However, it doesn’t cover fixed costs such as mortgage interest, and insurance.

We hope this has answered some questions for you, but if you are thinking of starting a new sole trader business and need extra advice, please get in touch to discuss all the above areas.