What is a Sole Trader?

Becoming a sole trader might be the perfect fit if you’re looking for a simple and straightforward way to start a business. As the most common business structure in the UK, sole traders enjoy a high degree of flexibility and control, making it a popular choice for startups, freelancers, and small businesses.

In this guide, we’ll break down everything you need to know about sole traders, from their unique advantages and potential drawbacks to the legal and tax obligations involved. By the end, you’ll be equipped to decide if this is the right path for your business aspirations.

Why Start as a Sole Trader?

There are many reasons why people set up as sole traders, including:

• Redundancy – People who are made redundant can take the first step in their business venture, perhaps using redundancy money to help set it up
• You see a gap in the market, using a skill they might have.
• You are fed up with working for a company and want to go it alone.
• It can fit around the family circumstances
• You want complete control of the business.

As the sole owner, you get to decide what products or services to offer, how to price them, and how to run your operation. This can be an excellent option for passionate people about their work and who want the freedom to call the shots.

However, being a sole trader also comes with some risks. Because sole traders are not a separate legal entity from their business, they are personally liable for any debts or losses incurred by the business.

Sole Trader Definition

A sole trader is someone who is self-employed and runs their own business. The sole trader structure is the simplest and most common, and sole traders can be found in many industries.

A sole trader is legally personally responsible for all business finances, also known as unlimited liability. There is no legal distinction between the business and the person.

You are personally responsible for any debts that the business incurs.

Am I classed as a Sole trader?

You may work for yourself but only have one client; in these circumstances, HMRC might decide that you should be an employee. If you are not sure of your employment status as a sole trader, you can check on the HMRC website.

Sole traders typically make all the business decisions, work for more than one client, decide when and where to work and sell goods or services to make a profit.

How to register as a sole trader

You will need to register as a sole trader with HMRC. HMRC will issue a UTR (unique tax reference number), and you will complete a self-assessment tax return each year.

HMRC allows you to register as a sole trader before the 5th of October in your second year of trading. Registering as soon as you commence as a sole trader is best. HMRC may issue you a fine if you register late.

How to Complete Accounts

Keeping accurate and organised accounting records is essential for any sole trader. It is essential to record all business expenses, however small they might seem. Here are some effective ways to manage your bookkeeping:

Accounting Software

There are lots of accounting software options available, ranging from free basic versions to paid subscriptions with advanced features. One of the most popular accounting software for sole traders is QuickBooks.

We recommend QuickBooks for its user-friendly interface. It automates invoicing and expense tracking tasks to save time and improve accuracy. They offer a sole trader plan that can track mileage and calculate taxes.

Bookkeeping Templates

We offer over 25 free bookkeeping templates. The most popular one is the cash book, which allows you to record a year’s income and expenses. It is easy to set up and use, with full instructions available.

How long do I Need to Keep Accounting Records?

In the UK, sole traders must keep their accounting records for at least 6 years from the end of the last company financial year they relate to. This means that if your accounting period ends on the 5th of April, 2024, you’ll need to keep your records until at least the 5th of April, 2030.

Can I complete the accounts myself?

It is possible to set up and maintain accounting records yourself. However, if you are unsure what you are doing, always seek professional help from a bookkeeper or accountant.

Although you will have to pay their fees, in the long term, you may save money as they know the expenses you can claim back and also save time. Some bookkeepers will assist you in setting up the accounts and train you. Support may also be available for any queries.

Sole Trader Taxes Explained

Sole Traders pay income tax and national insurance contributions (NICs) on the taxable business profits. NICs contribute towards your eligibility for certain state benefits, including the State Pension, and are calculated based on your profits.

There are two types of NICs you’ll likely need to pay as a sole trader:

Class 4 NICs: A percentage of your profits above a certain threshold. For the 2023/24 tax year, you pay 9% on profits between £12,570 and £50,270, and 2% on profits above £50,270.

Class 2 NICs: A fixed weekly amount, regardless of your profit level. As of the 2023/24 tax year, it’s £3.45 per week. You pay this if your profits are above the Small Profits Threshold, currently £6,725 per year.

Income Tax

Your Income Tax is calculated based on your total taxable income, which includes your business profits and any other income you may have (such as from employment or investments), minus any allowable expenses and reliefs.

Several self-assessment tax calculators are available; I use Employed and Self Employed. It will calculate annual, monthly, weekly and daily tax and take-home pay.

When Do I Pay Income Tax?

For sole traders in the UK, the tax bill, including both Income Tax and National Insurance contributions, is typically due on the 31st of January, following the end of the tax year. For example, the tax bill for the 2023/24 tax year (which ended on the 5th of April, 2024) is due on the 31st of January, 2025.  

However, “payments on account” might also be required. These are advance payments towards your next tax bill, usually due on the 31st of January and the 31st of July during the current tax year.  

What is a Sole Trader? – VAT Registration

Sole traders do not need to register for VAT unless they exceed the VAT threshold £90,000. Certain circumstances make it better to register for VAT, including purchasing high stock value. There are a few disadvantages to registering for VAT, including:

• Your pricing may have to be increased to cover the VAT
• Accounts will need to be completed quarterly to submit a VAT return
• VAT returns need to be submitted electronically through accounting software due to the rules of Making Tax Digital

The difference between a sole trader and a self-employed

A sole trader works on their own and is registered as self-employed. Someone self-employed can be in a partnership with one or more people. As a partnership, you would share the profits of the business.

If you are a director of a limited company, you will also be an employee of that company.

Examples of a sole trader

Here are a few examples of sole traders:

• Bookkeepers who offer to assist or complete your accounting records
• Hairdressers may work from home, hire a station within a salon or mobile
• Plumbers and electricians will visit the customer site and will require the relevant qualifications
• Gardeners and handypeople will offer their services at customers’ homes
• Small shop owners

Advantages of a Sole Trader

There are many advantages of being a sole trader, including:

• Choosing the hours you work
• All the profits are yours
• Easy to set up and get started with the right skills
• There is no need to register as a limited company at Companies House

Disadvantages of a Sole Trader

There are also disadvantages of being a sole trader, including

• No regular income
• You have to ensure there is regular work
• No cover if you are off sick
• No holiday pay
• You are responsible for any debts the business incurs

Read more about the advantages and disadvantages of being a sole trader.

Sole Trader Frequently Asked Questions

Do I need a Separate Business Bank Account?

Although you do not need a separate business bank account, it is recommended that you keep your personal and business finances separate.

Can I change to a Limited Company Later?

Yes, it is easier to change from self-employment to a limited company than vice versa. Limited companies are limited by liability, so the company owes the debt.

Is a Small Business a Sole Trader?

A small business is not always a sole trader. It can have different legal entities, including sole trader, partnership, limited company, and public limited company.

What is the Legal Entity of a Sole Trader?

A sole trader business has unlimited liability. There is no distinction between the business and the person. You are personally liable for any business debts.

As a Sole Trader, do I Pay my own Taxes?

Sole traders are responsible for paying their own taxes. Taxes include both National Insurance and Income tax.

Can I be Employed and Self-Employed?

Many people work full-time or part-time and run their sole trader business around their job and family commitments. It can be challenging to fit everything in, and you might have to work extended hours to complete the work, but it can be rewarding financially.

Can a Sole Trader Employ Staff?

While sole traders are typically known for running their businesses independently, they do have the flexibility to employ staff if needed to support their operations and growth.

Conclusion to What is a Sole Trader

A sole trader is an individual who owns and runs their own business. They are a self-employed person and are not considered to be employees of the company.

Sole traders have unlimited liability, which means they are responsible for any debts the business incurs. Taxes that sole traders are liable to pay are income tax and National Insurance. Sole traders are required to complete a self-assessment tax return each year.

Although there are some disadvantages to being a sole trader, such as no regular income or holiday pay, there are also several advantages, including choosing your hours and being your boss. If you’re considering starting your own business, becoming a sole trader is worth it.

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