13 December 2024
What is a sole trader in the UK?
5 minutes
If you’re interested in starting your own small business, you may have come across the term sole trader. But what is a sole trader in layman’s terms?
A sole trader (sometimes called a sole proprietor) is a self-employed person, who is — as the name suggests — the sole owner of a business. That business can take many different forms.
Of course, this is only the simplest answer to the above question. Let’s explore being a sole trader in a bit more detail.
What is the definition of a sole trader in the UK?
Gov.uk’s description of a sole trader is a person who runs their own business as an individual and is personally responsible for their business debts. Practically, in many ways, they are their business.
This is in contrast to a limited liability partnership (LLP), which is another kind of business structure. In an LLP, you share ownership of a business, as well as the responsibility of decision-making and a percentage of the profits (and of course liabilities). A key difference between sole traders and LLPs is that LLPs must be registered at Companies House, an executive agency of the Department for Business and Trade.
A third business structure, limited companies, must also be registered with Companies House. Limited companies are governed by certain standards and prescribed procedures that see the business as a distinct and separate legal entity and allow for a separation of finances. This means that in the event of insolvency, you are not personally liable for your company’s debt.
Read more: Sole trader vs limited company: All the info
How to register as a sole trader
Becoming a sole trader is fairly straightforward. It requires you to register for Self Assessment, the system HMRC uses to collect income tax from the self-employed. Registration can be done online or by completing form CWF1 and sending it off by post.
This registration must be made by 5 October the financial year after you begin operating as a sole trader. For example, if you were to start trading in September 2024 and go on to earn more than £1,000 by 5 April 2025, you will need to have registered with the HMRC by 5 October 2025.
You will usually receive what is known as your Unique Taxpayer Reference (UTR) by post within 15 working days or sooner if you make use of the HMRC app.
Specifically, you must register as a sole trader if you:
- Earn more than £1,000 during the tax year that runs 6 April to 5 April annually
- Require proof of being self-employed
- Want to make voluntary Class 2 National Insurance payments to help them qualify for benefits and State Pension
In registering for self assessment, you will need your National Insurance number, which you can find on any tax-related documents you have received in the past. If you’re unsure about yours, you can search for it online here or apply for one here if you’ve never had one.
What are 10 advantages of sole trader status?
Each business structure has its own benefits, whether you choose to set yourself up as a sole trader, a limited liability partnership, or a limited company. Let’s take a look at some of the advantages registering as a sole trader may offer you:
- The setup process is fairly simple and doesn’t require you to register with Companies House.
- It’s inexpensive to set up compared to other business models, which often benefit from the (paid) advice or assistance of other professionals. You will also avoid the fees payable to Companies House.
- Sole trader tax tends to be relatively uncomplicated with no need for a Corporation Tax or a Company Tax return as in the case of a limited company
- Sole traders enjoy all the profits of their hard work and business.
- Being a sole trader allows you full control of your business.
- Working as a sole trader means less paperwork. For example, you don’t need to submit the annual confirmation statement (confirming up-to-date company information) or statutory registers required by Companies House.
- A sole trader’s financial information is private, while those of a limited company or limited liability partnership are public, allowing competitors and the wider population to see their financial performance and other business details.
- As with other business structures, a sole trader may benefit from certain forms of tax relief, like capital allowances, when purchasing items like machinery, vehicles, and IT equipment required to operate their business.
- It’s simpler to progress from being a sole trader to a limited company should your business require it. For many, a sole trader business model is a stepping stone to opening a limited company, giving them time to refine their business, without overburdening themselves with the complexities of opening a limited company immediately.
- Closing down a sole trading business is often easier than closing down a limited company, which can be quite a complicated and expensive process.
What are examples of sole traders?
Many different types of professionals choose to register as a sole trader. However, typically, they are people who sell a service.
Sole traders often include tradespeople like plumbers, handymen, gardeners, and construction workers as well as digital and creative industry freelancers. Delivery people, taxi drivers, academic tutors, personal trainers, and beauticians often also fall under this category.
What are the differences between being self-employed and a sole trader?
Although these two terms admittedly share many similarities and are often used interchangeably, there’s a subtle difference between them. While all sole traders are self-employed, as they alone run and direct their business; not all those who are self-employed are sole traders.
Being self-employed means that you don’t work for anyone else, that you don't pay tax through PAYE, and that you’re responsible for submitting your own tax return. However, you may choose to set up your business in a number of different ways, and may not necessarily want to operate as a sole trader.
Being a sole trader describes a business structure, in other words, while being self-employed describes an employment status.
Sole trader FAQs
Can a sole trader have employees?
While sole traders often work alone in their business, they are able to employ staff as long as they register as employers with HMRC and get the requisite employer PAYE reference number.
Can you be a sole trader and have a full or part-time job?
Even if you have a day job that provides you with a regular salary, you can operate as a sole trader at the same time, as long as you declare both streams of income to HMRC.
Do sole traders pay tax?
Yes, sole traders do pay tax. As soon as your earnings exceed £1,000 a year, you will be required to submit a Self Assessment tax return detailing your business’s earnings and expenditures. Any tax owed must be paid by 31 January following the end of the tax year to which it relates.
Failing to register for tax as a sole trader, or doing so late, can result in stiff penalties. HMRC may charge a percentage of the tax it determines you owe. This amount can increase every day that passes after you were due but failed to register.
Do sole traders pay VAT?
Sole traders earning over £90,000 (increased from £85,000 in April 2024) must register for and submit a VAT return to HMRC annually. Sole traders who earn less than this threshold may still choose to register for VAT in order to claim VAT back on their business expenditure.
What is public liability insurance? And is it necessary for sole traders?
Being a sole trader means that you and your business are considered a single legal entity. So should you or your work be responsible for injuring a customer or damaging their property, it’s not just your business that can take a hit, but your personal finances, too.
It’s for this reason that most experts strongly recommend sole trader public liability insurance to help protect you and your business against any claims, compensation and legal costs that could arise during the course of running your business.
Quickfire summary
So, what is a sole trader in business? In many ways, the sole trader is the business. It refers to a person who runs their own business as an individual and is personally responsible for their business’s finances, including its debts.
At the end of the day, the decision as to whether a sole trader structure is the right option for you is a personal one. But If you decide that it is, contact us today to discuss any insurance you might need, including public liability insurance. Contact our team today.
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