What is a Sole Trader?

A sole trader is a type of self-employed person who works for themselves and runs their own business. Sole traders make up more than half (56%) of the UK business population. You can be a sole trader only or you can work as an employee as well, perhaps operating a sole trader side-hustle to generate additional income.

Being a sole trader is different to running a limited business, which is its own entity in law. When you’re a sole trader, you and your business are the same thing in law, which is why sole traders are personally liable for their business debts. For this reason, some people choose to protect themselves by registering their business as a limited company.

Sole traders pay Income Tax on their business profits, while limited companies pay Corporation Tax. Generally speaking, operating as a sole trader requires less tax admin. Sole traders have complete control over their business and can make all the decisions without having to consult shareholders or business partners. A sole trader’s financial information is private, while a limited company’s yearly financial summary information can be viewed by anyone via the Companies House website.

Becoming a sole trader is very quick and easy and it doesn’t involve any cost. You must do this by 5 October following the end of the UK tax year during which you earned taxable income. The UK tax year always ends on 5 April and starts on 6 April. Doing it as soon as possible is advised. Sole traders must pay Income Tax and NICs on their taxable income, after filing a Self Assessment tax return each year. Sole traders can claim a wide range of Allowable Expenses, which reduces their tax bill. Sole traders can keep all of their business profits after they’ve paid their tax bill. Sole traders earning more than £85,000 a year must register for VAT and submit quarterly VAT returns. Sole traders can employ others. It’s more tax efficient to operate as a sole trader if your profits are lower.