Six things you need to do to set up as a sole trader

Harriet Meyer / 10 March 2015

Millions of us choose to set up our own businesses in the UK, and navigate the financial issues that come alongside joining the army of sole traders.

This route offers an exciting chance to run your own company and financial affairs. However, it also requires some planning to ensure you get your personal finances in shape for the shift.

Here are some tips if you are thinking of setting up as a sole trader...

1.    Register with HMRC

You must register with HMRC helpline on 0845 915 4515 or go to the website by the third calendar month after you start, or you’ll face an automatic £100 penalty.

As a sole trader, you’ll pay income tax through self-assessment. The first sum is due on the 31 January following the end of the tax year, so ensure you’re slotting some cash away to cover this.

You will pay Class 2 national insurance contributions, at £2.75 a week for tax year 2014-15. However, if you earn less than £5,885 a year, you might not have to pay these.

2.    Tell your mortgage provider

Technically, you need permission from your mortgage provider or landlord to run a business from home. Whether the lender agrees will depend on its criteria, but if your business moves the mortgage from residential to semi-commercial, the lender is unlikely to agree.

Basically, lenders will be unhappy if they consider the trade is one that could impact on the value of the house. However, simply working in a spare bedroom should be fine.

3.    Consider business rates

If you use part of your property for business purposes, you may have to pay a particular tax known as business rates. However, this will depend on whether you use that part for domestic purposes as well. Find out more here. You may be eligible for small business rate relief. Contact your local council to have a chat about the particular rules in your area.

4.    Sort out insurance

You may want to consider specialist insurance, such as public liability insurance, if your business involves clients coming to your home, or professional indemnity insurance if you are providing advice or services. .

Your home contents insurance will cover stock and equipment in your home that could be damaged or stolen, but check the fine print for details on limits.

Another option is income protection insurance. This can be handy for the self-employed in case you’re off work because of illness or an accident and unable to earn and pay bills. It provides a tax-free income that kicks in after several months.

Read our guide to professional indemnity insurance.

5.    Remember long-term savings

You won’t get a company pension where an employer pays in a portion to boost your long-term savings. So you’ll need to work out your own plan for funding retirement, unless you already have plenty stashed away to cover this.

You could opt for a stakeholder pension, with low charges, or a self-invested personal pension for greater investment choice. Alternatively, ISAs offer another savings route - but whichever you pick, don’t forget to plan ahead for retirement.

Read our guide to the different types of pension. 

6. Set up a record-keeping system

When you set up as a sole trader, you’ll need to sort out an efficient filing system. You will need to keep all financial records and tax returns, alongside receipts and invoices in a safe place. Getting organised at the start is wise to avoid problems later down the line.

The opinions expressed are those of the author and are not held by Saga unless specifically stated.

The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.