How to Set Up a Business in the UK: A Comprehensive Guide (2024)

Introduction

You’re probably here because you’re wondering about the required steps to set up a business in the UK. If that is the case, you’ve arrived at the right place.

There are many reasons why you may be considering starting a business. You may want some extra income on the side, start something of your own, or try something new, among other things.

First things first, when starting a business in the UK, it’s important to choose the right legal structure. The three most common types of businesses are:

1. Sole traders: A sole trader is the simplest and most straightforward business structure. You run the business as an individual and keep all profits after tax. However, you are personally liable for any business debts.

Key Points:

• Easy to set up.
• Full personal liability for business debts.
• Simple tax and accounting responsibilities.

2. Limited companies: A limited company is a separate legal entity from its owners. This means personal finances are protected from business debts. However, there are more reporting and management responsibilities.

Key Points:

• Separate legal entity.
• Limited liability protection.
• More complex reporting and administration.

3. Partnerships: In a partnership, two or more people share ownership and responsibilities for the business. Partners share profits and are jointly liable for debts.

Key Points:

• Shared ownership and decision-making.
• Joint personal liability for business debts.
• Shared profits and responsibilities.

In this article, we will focus only on sole traders, providing you with a comprehensive step-by-step guide to set up your business and a checklist to ensure that you’ve got everything in order.

What Does Being Self-employed or Sole Trader Mean?

As mentioned earlier, you are considered a sole trader if you work for yourself, and you are not in any kind of business partnership. This means that you are your own boss. So you decide when you give yourself vacation days, raises, or nominate yourself as employee of the month!

Jokes aside, given that you’re the owner and only person running the business, you have to take care of the setup process. Yes, you can hire employees, but you’d still be the sole owner of the business, and you’re still considered self-employed.

You are also responsible for taking care of taxes, and operational expenses, and are personally liable for your debts and liabilities. On the upside, you get to keep all the money left after you pay all your costs and taxes — if there’s any left, that is.

Some advantages of being a sole trader include:

• Easy to set up and manage.
• Full control over business decisions.
• Lower setup and administrative costs.
• Simplified accounting and tax processes.

Some disadvantages include:

• Unlimited personal liability for business debts.
• Can be harder to raise capital.
• Business continuity depends on the owner.

You’re probably considered self-employed if you:

• “Run your business for yourself and take responsibility for its success or failure.
• Have several customers at the same time.
• Can decide how, where, and when you do your work.
• Can hire other people at your own expense to help you or to do the work for you.
• Provide the main items of equipment to do your work.
• Are responsible for finishing any unsatisfactory work in your own time.
• Charge an agreed fixed price for your work.
• Sell goods or services to make a profit.”

When Should You Set Up as a Sole Trader?

According to a Statista report, there are around 4.4 million businesses that operate as sole traders without employees. Almost 3 million of them are unregistered businesses.

There are various reasons for this, including lack of awareness, fear of bureaucracy, not knowing where to start, and misconceptions about taxation law.

Despite the availability of information and governing bodies willing to help, the process can be overwhelming without proper guidance. This article aims to simplify the process and help you navigate it easily.

According to the UK Government’s website, you need to register as a sole trader in 2024 if any of the following apply to you:

• “You earned more than £1,000 from self-employment between 6 April 2023 and 5 April 2024.
• You need to prove you’re self-employed, for example, to claim Tax-Free Childcare.
• You want to make voluntary Class 2 National Insurance payments to help you qualify for benefits.”

How Do You Register as a Sole Trader?

To register as a sole trader, you will need to contact HM Revenue & Customs (HMRC). HMRC is responsible for collecting money and paying for public services.

You need to notify HMRC that you intend to work for yourself. Regardless of the business name you choose, you will still be considered self-employed, not a company.

To register with HMRC, you need to take a self-assessment at the following link. Even if you’ve done this before, you will still need to complete the assessment again to register for insurance contributions.

During the process, you will need to provide information such as:

• National Insurance (NI) number.
• Name.
• Date of birth.
• Postal address.
• Telephone number.
• Email address.
• Name of business.
• Type of work you do.
• Start date.

Tax Obligations for Sole Traders in the UK

As a sole trader in the UK, you need to pay both income tax and National Insurance (NI) contributions on your taxable business earnings. Here’s a simplified guide to understanding these requirements:

Income Tax

Sole traders enjoy a personal allowance, which is the amount you can earn before paying tax. For the 2024/25 tax year, this personal allowance is set at £12,570.

• Personal allowance: Up to £12,570 – 0% tax.
• Basic rate: £12,571 - £50,270 – 20% tax.
• Higher rate: £50,271 - £125,140 – 40% tax.
• Additional rate: Over £125,140 – 45% tax.

If your income exceeds £100,000, your personal allowance is reduced by £1 for every £2 earned over this amount. Once your income is above £125,000, you no longer receive any personal allowance.

Example: Consider Jane, who is a freelance web developer. She made £30,000 in profit last year. After deducting her personal allowance of £12,570, her taxable income is £17,430. At the 20% tax rate, she would pay £3,486 in income tax.

National Insurance

For the 2024/25 tax year, if your profits are above £12,570, you will need to pay Class 4 National Insurance contributions:

• 6% on profits between £12,570 and £50,270.
• 2% on profits over £50,270.

Though Class 2 National Insurance contributions have been discontinued, you have the option to make voluntary contributions to maintain your eligibility for certain benefits.

You can find more information here and you can check your income tax here.

Paying Your Taxes

Once you’ve completed your self-assessment tax return, you can pay the owed tax to HMRC using various methods such as debit card, credit card, online banking, CHAPS, or in person at your bank.

Allowable Business Expenses

HMRC allows sole traders to deduct certain business expenses from their gross income, which can help reduce taxable income. Typical deductible expenses include:

• Office costs (e.g., stationery, phone bills).
• Travel costs (e.g., fuel, parking).
• Uniforms and work clothing.
• Employee wages.
• Financial costs (e.g., insurance and bank fees).
• Marketing and advertising costs (e.g., website expenses).

For a detailed list of allowable expenses, consult the government’s website.

Record-Keeping for Sole Traders

As a sole trader, you don’t have to submit reports or accounts to the government, but it’s essential to keep detailed records of your income and expenses. These include all your invoices and original receipts to support your tax return.

Here are the records you need to keep as per the government’s website:

• “All sales and income.
• All business expenses.
• VAT records if you’re registered for VAT.
• PAYE records if you employ people.
• Records about your personal income.
• Your grants if you claimed through the Self-Employment Income Support Scheme - check how much you were paid if you made a claim.”

Banking for Sole Traders

You’re not legally required to have a bank account to operate as a sole trader. However, it is advisable to have a separate business bank account. This will make it easier to separate your personal expenses from your business expenses, simplifying tax filing and avoiding confusion between business and personal transactions.

Do Sole Traders Need an Accountant?

While it’s not obligatory, having an accountant can be extremely helpful, especially if you don’t have the time or experience to do the paperwork. An accountant can help you with the following:

• Completing your self-assessment tax return.
• Tracking invoices and expenses.
• Calculating tax liabilities.
• Optimising your business for tax efficiency.

Insurance for Sole Traders

As a sole trader, you are personally liable for any debts or damages your business incurs. Consider obtaining insurance to safeguard yourself:

• Public liability insurance.
• Professional indemnity insurance.
• Buildings and contents insurance.

Writing a Business Plan, Doing Marketing, and Getting Support

Setting up a business involves more than just registering the business and familiarising yourself with the bureaucratic aspects.

You’ll also need to have an idea in mind, develop a business plan, market your business, and in some cases get support to ensure that your business is running smoothly and growing sustainably.

This is no easy task, especially if you’re self-employed and don’t have enough time or money to hire other people to help you out.

Below you can find a few things you need to keep in mind when you’re starting out and don’t know how to proceed.

Developing a Business Plan

A business plan can help you clarify your strategy, goals, action plan, and cash flow over a certain period of time.

Think of it as a roadmap that will help guide your decisions.

A business plan usually includes:

• A summary of your business and goals.
• A brief description of your business.
• A market analysis of your industry, target market, and competitors.
• A marketing and sales strategy.
• Financial projections to outline your budget, costs, and revenue/profit expectations.
• An operational plan detailing how you intend to run your business.

There are many resources available to help you write a business plan, including templates and AI tools.

Marketing Your Business

Marketing is crucial to running a successful business. Here are some cost-effective strategies:

• Digital Marketing: Use social media, email marketing, and search engine optimisation (SEO) to reach your target audience online.
• Traditional Marketing: Explore print ads, direct mail, and local networking events to raise awareness in your community.
• Branding: Develop a strong brand identity that sets you apart from competitors and resonates with your target market.
• Customer Relationships: Focus on building relationships with your customers through exceptional service and personalised communication.

Here’s an article on how to market your business on a budget.

Seeking Support

Starting and running a business can be challenging, but you don't have to do it alone. Consider seeking support from:

• Mentors and Advisors: Connect with experienced entrepreneurs who can offer guidance and advice.
• Networking Groups: Join industry-specific networking groups or business organisations to connect with other professionals.
• Government Resources: Take advantage of government programs and resources designed to support small businesses, such as grants, loans, and training workshops.
• Professional Services: Consider hiring professionals, such as accountants, lawyers, or marketing consultants, to help you navigate complex aspects of running a business.

You can also join our community of small businesses in the UK. We are also building a business directory, so if you want to be listed for free, drop us a line!

Conclusion

Starting a business as a sole trader in the UK involves several steps, from choosing the right business structure to understanding your tax obligations and marketing your business effectively. By following this guide and using the available resources, you can navigate the process with confidence and set your business on the path to success.

If you found this article helpful, make sure to subscribe to our newsletter, and to share it with people whom you think would benefit from it!

And last but not least, here’s a check list that will help you track where you are in the business set up process. If you have any questions, please do let us know. We’d be happy to help.

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Sole Trader Setup Checklist

1. Initial Planning

☐ Conduct market research.

☐ Create a business plan.

2. Legal and Regulatory Requirements

☐ Register as a sole trader with HMRC.

☐ Apply for a National Insurance number if moving to the UK.

3. Financial Management

☐ Open a business bank account.

☐ Set up a record-keeping system.

☐ Familiarize yourself with tax obligations:

• Self Assessment tax returns.
• National Insurance contributions.

4. Business Operations

☐ Decide on a business name and check for existing trademarks.

5. Branding and Marketing

☐ Develop your brand identity.

☐ Create a marketing plan.

☐ Establish an online presence (website and social media profiles).

6. Additional Steps

☐ Sign up for HMRC business support emails.