How to register as a sole trader

Name: TR Tax Advisers Limited
Address: Walthamstow, London
Telephone: +447586955861

Starting a technology business as a sole trader in the UK can be an exciting venture, but it comes with specific accounting and tax compliance requirements. Here’s a guide to help set you up for success.

Check that becoming a sole trader is right for you

The following considerations are important factors in deciding whether to structure as a sole trader.

Are you comfortable with having unlimited personal liability?

You will be personally responsible for any debts of your business. This is one of the main reasons tech start-ups opt to incorporate as a limited company in preference to becoming a sole trader. UK law does not recognise any distinction between an individual’s private and business affairs when that individual is simply trading on their own account. Consequently, your private assets e.g. your home - are available in law to pay business debts in the same way as the assets of the business are.

Are you concerned that some company information is publicly available?

If so, then setting up as a sole trader may be beneficial since it gives you additional privacy in some areas e.g. not having to publish your accounts with Companies House.

Do you expect to generate a loss in your first few years?

It is not uncommon for a technology business to incur losses in the few years of trading. There is often a need to invest significant sums in computer hardware and software and it is not a guarantee that you will have paying customers on day one. Relief for any losses may be obtained at a higher rate of tax, and more quickly, if you are a sole trader. More on losses at point 11 below.

When you begin to earn a profit, how much do you expect to make?

A company can give rise to certain tax advantages, but these can diminish due to the additional costs that come with running a company. In the 2024/2025 tax year, an English taxpayer with a £30,000 profit would save £573 in tax if operating as a sole trader vs a limited company. Note that a sole trader will not always be the most efficient, it will depend on your tax rate and the profit you earn. You should model your specific circumstances to make the correct decision.

Decide on your business name

You can trade under your own name, or you can pick another name for your business.

When issuing official paperwork e.g. invoices or letters to customers, then you must include your name and your business name (if you have one).

Certain words cannot be used in your sole trader name e.g., ‘limited, ’PLC’ or ‘LLP’. These terms are reserved for businesses that have been incorporated as companies or partnerships.

You must also avoid choosing a name that is the same as/similar to a trademarked name, such as Google or Apple.

The government has some helpful guidance on what counts as an acceptable business name.

Keep accurate accounting records

Accurate record-keeping is crucial for compliance and for understanding your business’s financial health. You should keep records of all your income and expenses, including:

Sales invoices
Receipts for purchases and expenses
Bank statements
Payroll records (if you have employees)

There are plenty of accounting software solutions that simplify the record-keeping process and help you stay on top of your bookkeeping. QuickBooks, FreeAgent and Xero are some of the solutions that are suitable for sole traders. Providers tend to offer tiered solutions so that you pay more for increased functionality, such as the ability to run payroll or file VAT returns. It is also worthwhile assessing what solutions your banking platform has – sometimes they offer free or discounted access to bookkeeping software.

You’ll need to choose an accounting method that is most appropriate for your business.

From the 2024 to 2025 tax year, the cash basis of accounting has become the default method of accounting.

Cash basis accounting – This method is suitable for most small businesses. You record income and expenses when you receive money from your customers or when you pay your suppliers. The benefit of this approach is that you will not pay Income Tax on money you have not yet received during your accounting period. If your customers take a long time to pay and your suppliers require payment up front then this can help with your cash flow.
Traditional accounting – This method requires you to record income and expenses by the date you invoiced or were billed. If your accounting period ends on 31 March and you sent an invoice to a customer on 30 March then you must record (and pay tax) on this invoice in the 31 March accounting period – even if your customer does not pay you until April or May.

If you want to use the traditional accounting method then you must opt out of cash accounting.

Registering with HMRC as a sole trader

Once you have decided that running your business as a sole trader is the most appropriate structure for you, the next step is to register for Self Assessment with HM Revenue and Customs (‘HMRC’) to inform them you need to file a tax return. We give details of when you need to register here.

The deadline for registering with HMRC is by 5 October following the end of the tax year (which runs from 6 April to the following 5 April). So if you started your business on 1 December 2023, you need to register for Self Assessment by 5 October 2024.

This registration process is straightforward and can be done online. You’ll need to provide details such as your name, address, and the nature of your business. Once registered, you’ll receive a Unique Taxpayer Reference (‘UTR’) number, which you’ll use for all your sole trader tax dealings.

If you have already registered for Self Assessment for another reason, you will also need to inform HMRC that you have started business as a sole trader.

Understanding your personal tax obligations

As a sole trader, you’ll be responsible for paying several types of taxes:

Income Tax: You’ll pay income tax on your business profits. The amount you owe depends on your total income for the year. If your annual income from the business is less than £85,000, you may complete the ‘short’ self-employment pages of the return, which simplifies your reporting requirements.
National Insurance Contributions (NICs): There are two types of NICs you need to be aware of and what you pay depends on the profits you make:

Class 2 NICs:

If your profits are more than £6,725 for the year then Class 2 NICs are treated as having been paid to protect your National Insurance record, which means you do not have to pay Class 2 contributions.
If your profits are less than £6,725 a year you do not have to pay anything but you can choose to pay voluntary Class 2 contributions.

The Class 2 rate for tax year 2024 to 2025 is £3.45 a week.

Class 4 NICs: These are based on your profits. If your profits are more than £12,570 a year, you must pay Class 4 NICs. For tax year 2024 to 2025 you pay:

6% on profits of £12,570 up to £50,270
2% on profits over £50,270

Filing your tax returns and paying tax

As a sole trader, you’ll need to file a Self Assessment tax return each year. This return will detail your income and expenses and calculate how much tax you owe.

The deadline for filing online returns is 31 January following the end of the tax year. The last tax year ran 6 April 2023 to 5 April 2024, so you have until midnight on 31 January 2025 to submit your online tax return.

You also need to pay the tax you owe by midnight on 31 January 2025. There is a second payment deadline of 31 July if you make advanced payments towards your tax bill but this should not apply to the first year of trading.

You will be charged penalties and interest for filing/paying late.

Claiming business expenses

You can reduce your taxable profit and the amount of tax you have to pay by claiming allowable business expenses. These can include:

Computer costs: Hardware, software.
Things you buy and resell: Computer components, licences.
Office costs: Office supplies, phone bills.
Premises: Rent, utilities, business rates.
Travel costs: Business travel, including mileage if you use your car for work, train fares, parking.
Marketing and advertising: Costs of promoting your business.
Professional fees: Accountancy costs, legal fees.
Financing costs: Interest, bank charges.
Staff costs: salaries, contractor expenses.

You cannot claim expenses if you use your £1,000 tax-free ‘trading allowance’ so it is worthwhile calculating whether the actual cost basis or the trading allowance gives you the most favourable result.

Not all costs are tax deductible straight away and you may need to claim capital allowances on asset purchases e.g. property or computer hardware. The accounting method you choose (cash or traditional) also determines the amount you can deduct on certain items.

Where costs have both a business and personal use then you will need to make a reasonable apportionment – only business expenditure is tax deductible. This is particularly relevant if you run your business from home. A reasonable apportionment could be the number of hours worked per year or the floor space available exclusively for business purposes – it is worthwhile modelling different scenarios to find the most appropriate apportionment for your business.

If you want to avoid complex calculations then HMRC does allow a simplified method which applies flat rates of tax relief for vehicles, working from home and living expenses.

Understanding VAT

Registration

VAT is a tax that you have to charge when making business supplies in the UK/Isle of Man. For example:

Selling computer hardware
Providing technology consultancy
Licencing software

VAT may also be charged when goods and services are brought into the UK.

Most technology goods and services are charged at the standard VAT rate (currently 20%). You can check the VAT rate for your supplies here.

If you are VAT registered you must account for VAT on all the taxable supplies that you make.

If you are not VAT registered but the value of taxable supplies you make is over a specific threshold then you must register for VAT and start to account for VAT. There are two ways you may exceed the threshold:

At the end of any month, the value of your taxable supplies in the previous 12 months is over the registration threshold; or
At any time, you expect the value of your taxable supplies in the next 30 days to exceed the VAT registration threshold.

The VAT threshold is currently £90,000.

If you register late, you must pay VAT on any sales you’ve made since the date you should have registered. It may be difficult for you to recover this VAT from customers and so it is important you understand when you are required to register. You may also be issued with a penalty from HMRC if you register late.

You can register for VAT online, from which point you start charging VAT on your sales and reclaiming VAT on your business purchases.

It is also possible to register voluntarily and this can help you recover the VAT you have incurred on business expenses during the early days of trading but it means you will have to start charging VAT to customers from the date of registration. You should understand how this voluntary registration can impact your ability to sell to customers – if you are a B2C business then your customers are unlikely to be able to recover any of the VAT you charge and you should understand whether adding 20% to your invoices will reduce demand for your product or services.

VAT returns and payments

Once registered, you will need to file VAT returns with HMRC – usually every quarter. You must submit a VAT return for every period, even if there is no VAT to pay or reclaim.

The deadline for submitting your VAT return is usually one month and 7 days after the end of the account period. If your accounting period ended on 31 March then your VAT return must be submitted by 7 May. This is also the deadline for paying HMRC.

Making Tax Digital (‘MTD’)

You must submit your VAT return using software that is compliant with MTD. Bookkeeping software such as QuickBooks or Xero should be compliant for this purpose, or you can ask an accountant to file for you. HMRC has a database of compliant software.

Operating payroll

If you hire employees, you’ll need to set up a payroll system to manage their pay and deductions. You’ll also need to report payroll information to HMRC in real time, usually each time you pay your employees. This is known as Real Time Information (‘RTI’).

As with VAT, your bookkeeping software can help you remain compliant and some solutions even automate parts of the process, although you will be responsible for reviewing the accuracy of information before submitting it to HMRC.

Planning for your tax bill

It’s important to plan for your tax bill to avoid any surprises. Set aside a portion of your income each month to cover your tax liabilities. Once you have submitted your first Self Assessment return you should know if you are required to submit a payment on account for the following tax year – this is due on 31 July and is calculated at 50% of your previous year’s tax liability.

Losses

As a sole trader, you can set a loss realised in the sole trade business against your other income or gains for the current or previous tax year. In the first 4 years of the business, this relief is extended so that losses may be carried back three years.

Example

You left your employment on 30 September 2023. You earned £50,000 and paid Income Tax of £7,484.

You started your sole trader business on 1 October 2023 and made a loss of £10,000 on your self-employment. You can claim a £2,000 Income Tax refund in your Self Assessment return.

Note that if you decided to start your business as a limited company on 1 October 2023, you could not use your £10,000 loss to reduce your Income Tax liability.

Staying informed

Tax rules and regulations can change, so it’s important to stay informed. Regularly check the HMRC website for updates and consider subscribing to newsletters or joining professional organisations for the latest news and advice.

Summary

Starting a technology business as a sole trader in the UK involves several accounting and tax compliance steps. By understanding your obligations, keeping accurate records, and seeking professional advice when needed, you can ensure your business remains compliant and financially healthy.

Investing in good accounting software can save you time and reduce the risk of errors. Look for software that offers features such as:

Invoicing
Expense tracking
Bank reconciliations
Tax calculations

Strong financial planning is key to the success of your business.

TR Tax Advisers Limited. Companies House registration number 15693007. Registered office address 128 City Road, London, EC1V 2NX. Trading address 197 St. John's Road, Walthamstow, London, E17 4JL.