Seven legal requirements you need to know as a sole trader

Being a sole trader offers many freedoms: flexible hours, full control over decision-making, and perhaps even eliminating the daily commute. However, you must still meet certain legal requirements to avoid penalties. Here are seven key legal obligations to keep in mind.

1. Register with HMRC

One of the most important legal requirements if you’re a sole trader is to register as self-employed with HMRC and file a self assessment tax return. You can do this online or by post. 

You should register as soon as you start trading, and no later than 5 October of the second tax year in which you trade. For instance, if you began trading in 2023, you must complete the registration process by 5 October 2024. Registering in a timely fashion is crucial. Once you register you'll receive a Unique Taxpayer Reference (UTR), and HMRC will be notified of your intention to file a self assessment tax return. 

There is one exception to this. If you earn £1,000 or less during the financial year, you don't need to register as self-employed or declare those earnings. This is known as the trading allowance. If your earnings exceed this amount, you must file a tax return through self assessment.

If your taxable turnover exceeds £90,000 in a 12-month period, or you expect it to exceed this amount within the next 30 days, you must also register for VAT. This tax applies to most products and services sold by VAT-registered businesses.

2. Choose a business name

As a sole trader, you don’t need to register your business with Companies House. However, you still need to choose a business name. You can trade under your own name, or opt for a trading name. The name appears on invoices, business correspondence and purchase orders, so choose it carefully.

The name cannot:

• Contain words like ‘Ltd,’ ‘limited,’ ‘PLC,’ or ‘LLP,’ as these suggest a different business structure

• Contain sensitive words that falsely imply a connection to government bodies or local authorities

• Be offensive

• Be the same as, or incredibly similar to, another registered business name

3. Keep financial records

Keeping clear financial records simplifies your tax returns and enables you to easily calculate your profits and losses. It’s also a legal requirement. You must maintain records of:

• Your sales and income

• Your business expenses

• Any personal income, such as earnings through PAYE

• PAYE records if you employ people

• VAT records if you’re registered for VAT

Although you don't submit documents with your tax return, HMRC could investigate your finances after you submit your self assessment and ask to see these records. To remain compliant, it's important you keep all receipts, bank statements, sales invoices and till rolls related to your business for at least six years. 

4. File your tax return

You are responsible for managing your own tax as a sole trader.

To do this, you must file a self assessment tax return each year. If you submit a paper return, the deadline is 31 October, while the deadline for an online return is 31 January.

Keep in mind that your tax return covers the previous financial year. For example, if you’re submitting an online tax return for the 2023/24 tax year, you must file it by 31 January 2025. You don’t have to wait until the deadline - feel free to submit your return as soon as the tax year ends.

5. Pay your tax bill

After submitting your tax return, you must pay your tax bill. This is usually done in two instalments: the first on 31 January, and the second on 31 July. The second payment is only required if you make advance payments on your tax bill, known as payments on account. 

If you anticipate being unable to pay in instalments or can't pay the full amount on time, you may be able to arrange alternative payment options with HMRC. This is why it's important to submit your tax return as soon as you can, as it gives time to plan and manage your payments once you know what you owe. 

6. Insurance and licences  

If you employ anyone, whether temporary or permanent, employers’ liability insurance is a legal requirement. This insurance covers the cost of compensation and claims an employee may make due to injury or illness caused by working for you. If you don't employ anyone or only employ immediate family members, it’s not a legal requirement. 

Although other types of business insurance are not obligatory by law, as a sole trader, you face risks that could disrupt your ability to continue working.

Consider these other types of insurance to protect yourself and demonstrate to potential clients that you mean business:

Professional indemnity insurance This protects you if a client is unhappy with your professional services or advice. It covers situations such as giving poor advice that harms a client’s reputation, or breaching a contract.

Public liability insurance If you work with or around the public, this insurance is worth considering. It protects you against claims from individuals who suffer injury or loss due to your work. If you hire out horses as part of your business, this insurance is also a legal requirement.

Tool insurance If you rely on tools for your work, tool insurance covers their replacement if they’re lost, stolen or damaged.

If you're unsure about the insurance you need or where to start, consider self-employed insurance. This bundle of policies protects you from various risks and you can often tailor it to ensure you only pay for what you need. 

Depending on your activities, you may also need a business licence. Not all businesses require one, but you'll likely need a licence if you sell alcohol, prepare and serve food, drive a taxi, advertise on the street, or provide care for children or animals.

7. Personal liability

As a sole trader, you are personally liable if things go wrong. Unlike a limited company, which is a separate legal entity, there is no separation between your personal assets and those used for your business.

If your business suffers a loss or you face financial difficulties, such as a downturn in work, lenders or utility providers can seize your personal assets to reclaim what you owe. To help protect yourself from this legal liability, consider the following:

• Insurance: Business insurance can cover a range of issues, from high legal costs to income if you're unable to work due to illness or injury. Ask yourself if you can afford to pay for a claim personally if something goes wrong. If you can't, insurance is worth considering.

• Separate finances: Consider using a business bank account and savings account to clearly separate your personal and business finances. This helps you better understand your financial situation and reduces personal risk if things aren’t going well. You may also want to use an accountant or accounting software for additional support.

• Use contracts: Ensure you have clear, well-drafted contracts and agreements with clients and suppliers to limit personal liability and set clear expectations.

• Consider a limited company structure: If your business is doing well or you want to limit your personal liability, consider changing your structure from a sole trader to a limited company. While this process takes time and involves additional legal requirements, it separates your business debts from your personal assets.