Starting your own business can feel exciting. Then come the questions.
Do I need to tell HMRC? When do I start paying tax? What records am I supposed to keep? Do I need a business bank account?
If you have started working for yourself, getting a few things organised early can make running your business much easier.
Here is what you need to know when starting out as a sole trader.
What is a sole trader?
Being a sole trader means you run your business as an individual. You can work under your own name or choose a business name, while you remain personally responsible for the business.
You might be a tradesperson, freelancer, consultant, beautician, designer, photographer or provide another service directly to your customers.
You do not need to form a limited company to start working for yourself.
For many people, becoming a sole trader is the simplest way to get started.
When do I need to tell HMRC?
You can begin trading before registering as self-employed with HMRC.
The important figure to know is the £1,000 trading allowance.
If your gross trading income is more than £1,000 during a tax year, you will normally need to register for Self Assessment. Gross income means the money your business receives before expenses are deducted.
The UK tax year runs from 6 April to 5 April.
There are circumstances where you may need to complete a tax return even when your income is lower, so it is worth checking your position rather than assuming the £1,000 allowance means you have nothing to do.
How do I register as a sole trader?
If you need to register, you do this with HMRC for Self Assessment.
Once registered, HMRC will issue you with a Unique Taxpayer Reference, usually called a UTR. You will use this when dealing with HMRC and completing your tax return.
There are deadlines for registering and submitting your return, so it is much easier to deal with this while everything is fresh rather than trying to reconstruct your first year of business later.
Start keeping records from day one
This is one of the best habits you can build when starting your business.
Keep records of the money coming into your business and the business expenses you pay.
Invoices, receipts and other supporting information should be kept as part of your records.
It can be tempting to think you’ll sort everything out when your tax return is due. A few transactions quickly become months of information to work through.
Keeping your bookkeeping current means you know where you stand and makes dealing with your tax responsibilities much simpler.
Do I need a separate business bank account?
As a sole trader, you do not normally have to open a separate business bank account, although your bank’s terms may affect how you can use a personal account for business purposes.
Keeping your business transactions separate from your personal spending can make bookkeeping considerably easier.
It becomes much clearer which payments relate to your business, and you spend less time trying to remember what individual transactions were for.
If you are opening an account specifically for your business, check that the account is suitable for business use.
What business expenses can I claim?
Some of the costs you incur while running your business can be deducted when calculating your taxable profit, provided they meet HMRC’s rules.
What you can claim will depend on what your business does.
The key is to keep good records as you go. When you know what you spent and have the information to support it, preparing your accounts becomes much easier.
We will cover allowable expenses in more detail in a separate Brease guide.
When will I pay tax?
As a sole trader, tax is generally based on your taxable business profits, rather than the amount of money that comes into your bank account.
Depending on your income and circumstances, you may have Income Tax and National Insurance to pay.
Your Self Assessment tax return tells HMRC about your income for the tax year and calculates what you owe.
One thing that can catch new sole traders out is that the tax does not automatically disappear from each payment you receive.
Putting money aside for your tax as you earn can help you prepare for the bill when it arrives.
What about Making Tax Digital?
Making Tax Digital for Income Tax is changing how many sole traders report information to HMRC.
It is being introduced according to qualifying income, so whether and when it applies to you will depend on your circumstances.
Even if MTD does not apply to you yet, keeping digital records from the beginning is a sensible way to run your business.
You can read our Making Tax Digital Explained for Sole Traders guide for more information about how MTD works.
Do I need accounting software?
A spreadsheet or basic records may feel manageable when you only have a handful of transactions.
As the business becomes busier, staying organised can take more time.
Accounting software helps keep your business records together and can connect directly to your bank, making it easier to keep your bookkeeping current.
With Brease, the software is part of the service. You do not need to find an accounting system and then find someone separately to help you use it.
We combine straightforward accounting software with support from real accountants.
Do I need an accountant as a sole trader?
You are not legally required to have an accountant simply because you are a sole trader.
The better question is whether you want to manage your accounts and tax responsibilities yourself.
Some sole traders enjoy doing it. Others would rather spend that time running their business.
An accountant can also help you understand what needs doing, make sure your records are being handled correctly and answer questions when something does not make sense.
You can read more in our guide Do Sole Traders Need Accountants?
Start the way you mean to continue
The early days of a business are when good habits are easiest to build.
Getting your records organised now means you are not trying to untangle everything when your first tax deadline arrives.
Brease is built specifically for sole traders who want their accounting kept simple.
Your accounting software is included, your bookkeeping stays up to date throughout the year, and you have real accountants available when you need support.
That means you can get on with building your business knowing the accounting side is being looked after.
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Looking for more simple business advice?
This guide is part of the Brease Guides collection, created to help sole traders understand bookkeeping, tax and Making Tax Digital without the jargon.
