What is a sole trader?

A sole trader is a self-employed person who owns and runs their own business as an individual. A sole trader business doesn’t have any legal identity separate to its owner. That leads many to say that as a sole trader you are the business. In this article, we look at what a sole trader is, how to get started and your ongoing responsibilities.

It’s useful to compare the features of a sole trader to other business structures like a general partnership, limited partnership, limited liability partnership, company limited by shares and company limited by guarantee.

The sole trader business model can be used by many types of business. It is perhaps most popular among tradesmen providing services to individuals and families. So it’s common to find plumbers, decorators, plasterers, hairdressers and other individual providers of specialist services operating as sole traders. But you might also find other types of business operating as sole traders, from small shops and manufacturers to internet entrepreneurs and self-employed consultants.

Unlike many other types of business, for a sole trader:

• There is no requirement to register the business with Companies House or make ongoing filings of information with them.
• There are no directors to run the business, just the sole trader.
• There are no shareholders to invest capital. Instead, funding for the business is limited to what the sole trader can raise personally.
• There are not multiple partners like in a general partnership. Therefore, the sole trader model is not usually suitable if you’re looking to go into business with someone else, sharing the responsibility and rewards.

However, a sole trader shares many characteristics with other business forms, including:

• You still have to report and pay tax to HMRC. We look at the process of registering as a sole trader with HMRC and your ongoing responsibilities below.
• While it may be true that as a sole trader ‘you are the business’, it’s still prudent to manage certain things separately. That includes having a separate bank account for the business to your personal account.
• If you choose to trade under a name other than your own name, you must still follow certain rules around naming your business. For example, your business name cannot be offensive, contain certain ‘sensitive words’ or copy that of another existing business. You must include your own name and, if different, the name of the business on business documents like invoices, letters and receipts.
• You can employ staff. Being a sole trader means you bear all responsibility for the business, not that you have to work on your own.

Getting started as a sole trader

If you start working for yourself on a self-employed basis as a sole trader, you should register with HM Revenue and Customs (HMRC). This can be done online, and HMRC state on their website firm requirements to register:

• If you earned more than £1,000 from your sole trader business in the last tax year (6 April to 5 April)
• By 5 October in your business’s second tax year

While it’s not possible to register in advance, most businesses will inform HMRC promptly after they start trading. That will include registering for self assessment, if you haven’t had reason to do so before.

Other things you’ll need to consider when starting the business include:

1. Whether, before starting in business, you need permission to do so from your local authority or another body – this applies to types of work like driving a taxi, for example.
2. Setting up a bank account – it’s invariably best to keep a bank account for the business which is separate to your personal accounts
3. Depending on the type of business, finding suitable premises from which to operate. If you choose to operate from home, you may need to consider whether your rental agreement permits this. Home alterations may be necessary (and planning permission required). You may need to pay business rates to your local authority for the use of part of your home for business purposes.
4. Whether you’ll need complete VAT registration (or want to register voluntarily) and, if so, then register for VAT
5. If you’re going to employ people, registering a Pay As You Earn (PAYE) payroll scheme. You’ll also need to consider employment contracts, statutory pension entitlements and various other employment-related matters.
6. Business insurance that’s required or desirable. In another article, we look at some of the different types of business insurance that may be necessary or useful.
7. If you’re a contractor or sub-contractor in the construction industry, you’ll need to register with the Construction Industry Scheme (CIS).
8. Any funding that might be available for the business – for example, grants or loans.

Tax responsibilities

As a sole trader, the income from your business is counted alongside your personal income. This means that, whether or not you’ve had to do so before, you’ll now need to complete a self assessment tax return every year detailing your income and expenses. You’ll also need to pay to HMRC:

• Income tax based on your taxable income
• Your first £1,000 can benefit from the trading or property allowance, effectively meaning you pay no income tax on it. However, if you claim this allowance you can’t at the same time deduct business expenses.
• Class 2 national insurance contributions (NICs) – 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.

Any tax you owe must be paid by 31 January following the end of the tax year to which it relates. You may also need to make twice yearly ‘payments on account’, which are effectively advance payments for the current tax year.

If you employ people as part of your sole trader business, you must collect the right amount of income tax and national insurance contributions from their pay and regularly pay these to HMRC. That means you’ll also need to operate a Pay As You Earn (PAYE) payroll scheme.

If you’re registered for VAT, you’ll need to complete regular VAT returns and make VAT payments to HMRC.

Other ongoing responsibilities of sole traders

As a sole trader, you must maintain accounting records that follow standard accounting practice, giving a true and fair picture of the business. However, unlike most other types of business entity, there’s no need to maintain accounts in a specific form or structure.

As part of this, you’ll need to keep good records of your sales and expenses incurred. These will then be invaluable when you come to complete your annual self assessment tax return.

Unlike a limited company, there’s no need to file a confirmation statement or indeed to make any filings with Companies House. But you’ll still need to fulfil requirements that apply to all types of business. For example, you need to ensure you have the right insurance in place and keeping on top of Health and Safety requirements.

A previous version of this article was published on 19 May 2020. It is updated regularly based on tax threshold updates and other changes.