What Is a Sole Trader?
A sole trader, also known as a sole proprietor, is an individual who owns and operates a business independently. In this business structure, there is no legal separation between the owner and the business entity, meaning the owner has unlimited personal liability for the business’s debts and obligations. Sole traders have complete control over their business decisions and report their income and expenses on their tax returns. It is a common and straightforward form of business ownership, often chosen by self-employed individuals and small business owners.
It’s common to find tradespeople like plumbers, decorators and hairdressers operating as sole traders. However, sole trading can also be popular among consultants and smaller businesses. Sole traders will have to submit income tax returns to HMRC each year. They will also have to pay NICs and National Insurance contributions.
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What is a Sole Trader?
A sole trader, also known as a sole proprietor, is a type of business structure in which an individual operates and owns a business as the sole owner and decision-maker. There is no legal distinction between the owner and the business in a sole trader business. Here are some valuable characteristics and details about sole traders:
- A sole trader is a business structure in which a single individual owns and manages the business. The owner is personally responsible for all aspects of the business, including its profits, losses, debts, and decisions.
- One significant characteristic of sole traders is that the owner has unlimited personal liability for the business’s debts and obligations. If the business incurs debts or faces legal issues, the owner’s assets (such as their home and savings) are at risk to cover those liabilities.
- As the sole owner, a sole trader has complete control and decision-making authority over the business, and they make all business decisions, including operations, finances, and strategic planning.
- In the UK, sole traders are not required to register their business structure with Companies House, unlike other business structures such as limited companies.
- Sole traders report their business income and expenses on their tax returns. They are subject to income tax on their business profits, and they may also need to pay National Insurance contributions (NICs) on their earnings.
- Sole traders are responsible for maintaining accurate financial records and accounts for their business, which includes keeping records of income, expenses, receipts, and invoices.
- Sole traders can operate under their name or choose a business name (also known as a trading name), and they must comply with legal requirements regarding business name registration if they use a business name.
- Sole trader businesses are often small and provide flexibility to the owner regarding business operations and decision-making. This structure is common among freelancers, independent contractors, small tradespeople, and self-employed professionals.
- Sole traders retain all the profits the business generates but are also personally responsible for any losses incurred.
- While sole trader businesses can be successful and profitable, they may need help raising capital and expanding the business compared to other business structures like limited companies.
| Sole Trader Tax Information |
| VAT |
complete regular VAT returns and make VAT payments to HMRC
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| How much tax do I pay? |
Income tax based on your taxable income
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| <£1000 |
You pay no income tax on your first £1,000. However, if you claim this allowance you can’t at the same time deduct business expenses.
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| Class 2 national insurance contributions (NICs) |
Charged at a fixed rate of £3.45 per week in the 2023/24 tax year, unless your annual profits are less than £12,570.
|
| Class 4 NICs |
In 2023/24, these are 9% of profits between £12,570 and £50,270 and 2% on profits above £50,270.
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| Date Due |
31st of January (for the previous tax year). Sometimes you will need to do this in 2 payments
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| Employees |
For any employees, you’ll also need to operate a Pay As You Earn (PAYE) payroll scheme.
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A Sole Trader is Self-employed
The decision to work as a sole trader is personal, often down to individual priorities and ambitions. But it’s important to remember that you’re personally liable for any debts, and HM Revenue and Customs will expect your total income tax payment each year based on business profits. This requires accurate and timely bookkeeping, invoicing & expense management, which can be facilitated by Deskera – an accounting software that also helps with CRM, HR, payroll & financial reports.
A common choice for new businesses is to register as a sole trader. Once registered, you must submit a Self-Assessment tax return to HMRC and pay any income tax, National Insurance contributions, Value Added Tax (VAT) or Relevant Contract Tax (RCT) due. You’ll also need to keep records digitally for the Making Tax Digital rollout.
Sole Traders Have No Shareholders or Directors
As a sole trader, you have complete control of your business and are personally responsible for all losses and debts. Profits can be ploughed back into equipment, operational costs and staff rather than being taken out as taxable income.
However, you must register your business name with the local authorities and follow strict record-keeping and disclosure requirements. Moreover, you must register with HMRC for corporation tax and comply with record-keeping and submission deadlines.
You must also keep accounting records of your sales and expenses, which must be kept digitally as part of the Making Tax Digital (MTD) rollout. Some online bookkeeping software packages offer automation of these tasks and are popular with sole traders. However, you must ensure that the software meets HMRC’s requirements.
A Sole Trader Has Unlimited Liability
- If you’re a sole trader, all the profits and debts of your business are your responsibility. This means if your business goes bust, you could also lose all of your personal assets.
- You’ll also have to submit a self-assessment tax return each year and pay income tax on your profits. However, you won’t have to pay corporation tax or keep a set of statutory registers as required by limited companies.
- Being a sole trader will help you to build up a reputation for reliability and credibility.
- This is because your customers, suppliers and partners know that you’re putting your money on the line and are entirely responsible for any losses the business may face.
- This could lead to more significant opportunities for growth and collaboration.
A Sole Trader Does Not Need A Separate Bank Account
Many people who want to work for themselves start as sole traders due to the simplicity of setting up and the low administrative costs. This operating structure also gives the proprietor flexibility and control, meaning they can take their business in different directions if needed.
As a sole trader, you must keep good records of your income and expenses to complete a yearly self-assessment to determine any due tax. If you employ anyone, you must also register for VAT and operate a Pay As You Earn (PAYE) payroll scheme.
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Tax
As a sole trader, you’re personally responsible for every element of your business. This means that keeping accurate records of sales and expenses is vital – especially since April 2019 when HMRC started making it mandatory to do so digitally as part of the Making Tax Digital programme.
You also need to register for income tax. However, the process is more straightforward than for owners of limited companies who must file a confirmation statement and maintain statutory registers. You can also switch to this operating structure from a limited company without dissolving your registered business.
Sole Trader – Other useful links from our Knowledge Centre:
How to Manage Business Finances Correctly and Efficiently
Unlocking Business Potential: Strategies for Long-term Success
The Impact of Sustainability on Ecommerce Businesses
Remember to Compare Your Business Costs is here to help your business every step of the way from business advice, or saving you time and money on your business purchases such as: