Step 1: Sole trader or limited company?
This is the first decision every new business owner faces. Both are legal structures for running a business, but they work very differently.
| Sole trader | Limited company (Ltd) | |
|---|---|---|
| Setup cost | Free | £12 (Companies House) |
| Liability | Unlimited (personal assets at risk) | Limited to company assets |
| Tax | Income tax + Class 2/4 NI | Corporation tax (25%) + dividend tax |
| Admin | Simple Self Assessment | Annual accounts, confirmation statement, payroll |
| Best for | Freelancers, side hustles, low turnover | Earning over £30-40k, wanting credibility, multiple owners |
As a rough guide, if your profit will be under £30,000, sole trader is simpler and cheaper. Above that, a limited company usually saves tax because you can pay yourself a mix of salary and dividends.
Step 2: Register
Sole trader: Register with HMRC for Self Assessment. This can be done online at gov.uk and takes about 10 minutes. You will receive a Unique Taxpayer Reference (UTR) by post within 10 days.
Limited company: Register with Companies House at gov.uk/set-up-limited-company. You need a company name, registered address, at least one director, and details of shares. It costs £12 online and is usually approved within 24 hours.
Step 3: Open a business bank account
Sole traders are not legally required to have a separate bank account, but it makes bookkeeping vastly easier. Limited companies must keep business finances separate by law.
Starling, Tide and Mettle offer free business accounts. Traditional banks (Barclays, Lloyds, NatWest) often have 12–18 months of free banking for new businesses.
Step 4: Understand your tax obligations
- Income tax / Corporation tax — you must pay tax on profits. Self Assessment deadline is 31 January. Corporation tax is due 9 months after your accounting period ends.
- VAT — you must register for VAT if your taxable turnover exceeds £90,000 (2025/26 threshold). You can register voluntarily below this if your clients are VAT-registered businesses.
- National Insurance — sole traders pay Class 2 (£3.45/week) and Class 4 (6% on profits between £12,570 and £50,270). Ltd company directors pay through payroll.
Step 5: Get insured
At minimum, consider professional indemnity insurance (if you give advice or provide services) and public liability insurance (if you interact with clients in person). If you hire staff, employers’ liability insurance is a legal requirement.
Common mistakes
- Not putting money aside for tax — put 25–30% of every payment into a separate savings account.
- Overcomplicating it — you do not need a website, logo and business cards on day one. Get your first paying customer first.
- Ignoring bookkeeping — track every expense from day one. FreeAgent, Xero or even a spreadsheet. Catching up at year-end is painful.
- Not checking the company name — search Companies House and the Intellectual Property Office trademark register before committing.
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