Thinking of becoming a sole trader?

05th January 2022
Written by Alice Hickling

Everything you need to consider when becoming a sole trader and how to start the process

What is a sole trader?

A sole trader is a self-employed individual that runs their own business as its exclusive owner. For sole traders, there is no legal separation between the business and the individual meaning that a sole trader is personally liable for the debts of their business and as such they face unlimited liability. This is unlike with a limited company where the business and individual are two entirely separate legal entities.

Sole trading is seen as one of the most accessible ways to enter self-employment. It is quick and relatively easy to get set up as a sole trader, among some of the other benefits, sole traders have less statutory obligations and don’t have any shareholders to split the earnings amongst.


How to become a sole trader

The process to get set up as a sole trader is straightforward:


  •  Decide on a name for your business. For many sole traders providing a personal service, such as graphic design services, simply using your personal name can be sufficient. There are some guidelines to be aware of when choosing a name. For example, it should not be the same as any pre-existing trademark or include words such as ‘Limited’, ‘LLP’, or ‘PLC’.

  • Register for Self-Assessment tax return before the 5th October after the end of the tax year you began trading. For example, if you began trading on 1st January 2021, you will need to register by 5th October 2021. However, if you began trading on 1st May 2021, you will not need to register until 5th October 2022.

  • You may also be required to register for VAT if you go over the VAT registration threshold (£85,000 a year).


You will only need to officially set up as a sole trader if you earn over £1,000 from self-employment within any given tax year.


What will your responsibilities be as a sole trader?

Annual self-assessment tax returns

 Any sole traders who, over the past tax year, have earned over £1,000 will be required to complete a self-assessment tax return (SATR). Self-assessment tax returns are a system used by HMRC to collect income tax. It is an annual responsibility that follows strict deadlines and must be completed either online or by post.

When you complete a tax return, HMRC will calculate the relevant income tax and National Insurance owed, which you must pay by 31st January each year.

To help you get the self-assessment ball rolling, we provide every Qdos customer with 30% off the self-assessment tax return service with GoSimpleTax. Their tool automatically calculates the amount of tax owed and makes it easier to keep track of income and expenses throughout the year. When January comes, all you need to do is submit to HMRC and pay your tax bill!

Not a Qdos customer but still wish to try the free version of their service? Click here.

For more information about self-assessments, key dates, and to learn about payments on account, visit our self-assessment information page. There you will also find more information about the service offered by GoSimpleTax.

Keep records

As the only member of their business, it is a sole trader’s responsibility to keep an accurate account of any business incomings, outgoings, and expenses.

Keeping a clear record of your business activities will help to make your annual self-assessment tax return easier. Sole traders should keep all receipts and invoices organised and filed away.

Consider setting up a separate bank account

Whilst sole traders are not legally required to have a separate bank account for their businesses, ensuring banking is kept separate and clear may help to keep track of business spending. A sole trader may also want to consider engaging an accountant to help effectively manage their finances.


Associated risks and how to combat them

As mentioned previously, sole traders face unlimited liability. As such, a sole trader is liable for any debts, damages, or losses that their business faces.

Because of this, business insurance is an invaluable resource. Here are three of the top insurances trusted by sole traders to protect them from loss.



Professional Indemnity

This insurance policy is popular among all self-employed who provide advice, design or consultancy and is designed to react where an alleged error or omission in the services provided leads to third party financial loss.

Whilst having Professional Indemnity insurance in place is not a legal requirement, it might just prove vital for a sole trader. Mistakes sometimes happen. Without adequate PI coverage, a sole trader who is financially tied to their business opens themselves to unnecessary risk.

It is not only the losses of the client that sole trader’s have to think about, but the legal expenses that defending an investigation could incur. Negligence claims may involve a dispute going to court and legal fees soon mount up. The safety net that professional legal representation provides could prove invaluable.



Public Liability

Public Liability insurance provides cover in instances where legal action is brought against you by a third party in respect of physical injury or damage to property caused by you during the provision of services.

In the instance of an injury to a third party, there are plenty of impacting factors that could see the cost of claimant damages rise. For example, if the injured third party required time off work, rehabilitation, or medical expenses. In addition to this, the length of time an injury persists must be considered. Limits of indemnity for Public Liability tend to start at £1m.

It is no wonder then that this cover remains a go-to for many self-employed. In fact, 64% of 400 self-employed professionals surveyed by Qdos in 2019 held Public Liability insurance for their business.



Tax Enquiry Insurance

Tax Enquiry Insurance provides you with an expert defence in the event of a range of HMRC enquiries. As a sole trader facing unlimited liability, the risk of investigation by HMRC poses quite a financial risk.

In the event of an enquiry, HMRC have the right to investigate into previous tax years and regularly exercise their right to do so. Sole traders are personally responsible for any errors in the calculation of their tax.

When you consider the cost per hour for professional representation, having adequate Tax Enquiry Insurance in place could prove more economical whilst also providing a level of technical expertise that may just nip a claim in the bud, minimising time a sole trader would spend dealing with HMRC instead of fee earning activities.

At Qdos, we provide a service that covers the entirety of the tax enquiry process. This insurance offers access to tax advice from in-house experts with claims handled by former tax inspectors.

We specialise in award-winning insurance for an industry of flexible workers. Our insurance policies can be quoted and purchased entirely online within minutes, see here for more details. If you wish to discuss your options give us a call on 0116 269 0999 or email us at [email protected].

Alice Hickling
Written by
Alice Hickling
Part of the Qdos marketing team, Alice Hickling is our chief Copywriter. She has worked in the contracting industry for over 4 years with bonus experience as an IR35 Status Consultant. She gets a kick out of the written word but is also responsible for singlehandedly keeping the plants of the Qdos office alive. A role she does not take lightly.

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