Updated 22 June 2022
7min read
Being a sole trader is often considered the simplest way of running a business – at least when the operation is a small one. You have flexibility and full control over how you operate – but you’re also personally responsible for its success or failure, which can be daunting and potentially very costly.
Sole traders don’t have to register with Companies House, but they do have to maintain accounting records, pay income tax and file a self-assessment return with HMRC every tax year. For all the ins and outs of being a sole trader, read on.
When you are both self-employed and the sole owner of your business, you’re considered a sole trader. Sole traders have no shareholders or directors, unlike a limited company, and no other people responsible for liabilities, unlike a partnership.
You’re in full control of the business, overseeing its assets and benefiting from all profits after tax. This can be rewarding, but it also comes with a risk. Sole traders have what’s known as unlimited liability, meaning if the business becomes insolvent or is sued, then you’re personally liable to creditors and must pay any damages yourself.
Sole traders are most commonly small businesses that provide a service to individuals and families. They often have no or very few employees, and include the likes of photographers, plumbers, interior decorators, makeup artists or hairdressers.
A sole trader is a self-employed person, but a self-employed person is not necessarily a sole trader. It all comes down to your business structure.
You’re a sole trader when you’re self-employed and the sole owner of your business. If you’re self-employed, but are in a business partnership or run a limited company, you’re not a sole trader. Most contractors operate as limited companies (either one-person companies or under an umbrella company), so even though they work alone and employ no-one, their business is not a sole trader but a company.
Being your own boss means you set the rules. You have full control over what you do, when you do it and how you do it. This allows for more flexibility, giving you the freedom to make quick decisions without the need for any board or shareholder approval (which is useful when you’re dealing one-on-one with clients).
There are other advantages to being a sole trader, including:
Working outside of a company structure has its drawbacks. The buck stops with you, so you take all responsibility for big decisions. Some sole traders also battle with striking a healthy work-life balance, since it’s hard to know when to take time off. But more serious disadvantages include:
To register as a sole trader, you need to:
There’s no need to register with Companies House as a sole trader.
Sole traders need to pay income tax, as well as Class 2 and 4 National Insurance (NI) contributions, on all taxable business profits.
Sole traders that earn less than £100,000 in a tax year benefit from a personal allowance (or tax-free income), which for the current year is £12,500. If you earn over £100,000, this allowance decreases by £1 for every £2 of income over £100,000. If you earn over £125,000, you don’t receive a personal allowance.
The amount of income tax you pay depends on your income after this personal allowance. The following table is useful:
Band |
Taxable income |
Tax rate |
Personal allowance |
Up to £12,500 |
0 per cent |
Basic rate |
£12,501 - £50,000 |
20 per cent |
Higher rate |
£50,001 - £150,000 |
40 per cent |
Additional rate |
Over £150,000 |
45 per cent |
As an example, Remy is a plumber who made a £19,000 profit last year. After subtracting his personal allowance, his taxable income is £6,500. This falls into the 20 per cent band, meaning he pays £1,300 in tax.
If your business profit is over £6,475, you’ll need to pay Class 2 NI contributions, which is currently £158.60 a year. If your profit is over £9,500, you’ll also need to pay Class 4 NI contributions, which is calculated as a percentage of your total profits during your Self Assessment.
After completing your self-assessment return and calculating the tax you owe, you can pay HMRC using a debit card, credit card, online banking, CHAPS or by visiting your bank.
Often, HMRC won’t tax you on money that you need to spend to keep your business running. For this reason, when calculating your tax you can deduct a range of operating expenses from your gross income. You can view the full list of tax deductible expenses here.
Sole traders don’t need to submit as many accounts to HMRC as limited companies. However, you do need to keep a detailed record of all your business income and expenses, which will be used during your tax return. This includes original invoices and receipts.
Sole traders aren’t legally required to have a dedicated business bank account. Because HMRC treats your personal and business income as one and the same, you can use your personal bank account for your business. However, it is highly advisable to keep everything separate so that you don’t end up spending business funds on personal purchases, or vice versa.
Accountants are a valuable support system for sole traders. Although you don’t need to submit as many accounts as a limited company, an accountant can still help you navigate your self-assessment every year, keep track of your invoices and expenses, and calculate how much tax you need to pay. With personal allowances and tax-deductibles, working out what you owe can get complicated.
Staying on top of your tax and accounts is particularly important for sole traders, since you’re personally liable for any debts. But accountants can also help you save money, making sure your business is as tax efficient as possible.
As a sole trader, you’re liable for any debts or damages incurred by the business, and at risk if you find yourself unable to work. For these reasons, it’s worth taking out business insurance as a sole trader. What you need depends on your business, but the four main types worth exploring include:
Being a sole trader is a good place for a new business to start. However, as your profits grow, you could lower your tax bill by becoming a limited company. This will also give you limited liability (thus better financial security), as well as greater borrowing power and more competitive credibility.
But you don’t have to become a limited company. Some people are happy staying sole traders. If you do you think you’re ready to make the move, speak with your accountant about it. They’ll assess whether your company is in a good financial place to set up as a limited company and offer you informed advice on the next steps.