Your Questions About Being A Sole Trader In The UK Answered

When you decide to start your own business, one of the first things you need to do is to decide what business structure is the best for you.

One of the most popular business types is sole trader or sole proprietorship. It has many advantages over, for example, a limited company. But there are also drawbacks.

In this article we will answer all your questions about being a sole trader so that you can make the right decision for your business venture.

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What is a sole trader? 

First of all, let’s clarify what being a sole proprietor is. 

A sole trader is a business owned by a single person. That means there’s a single person responsible for handling all the decisions, taking responsibility for the company and ultimately keeping all the profits. 

With this business structure there is no difference between the owner and the business. Unlike a limited company, where the business is its own legal entity.

They can be funded by their own savings, bank loans or personal loans. 

How to set up as a sole trader?

Setting up your business as a sole proprietor is simple and easy. 

It involves just three easy steps. 

1. Tell the HMRC that you’re self-employed. This involves just filling out one simple form. 
2. Choose your business name. If you want to stop others from trading under this name, you might be able to also register for a trademark. 
3. Register for Self Assessment for your tax and make sure you file them annually. 

That’s it. Pretty simply, huh? If you want to know more details about setting up as a sole tradership, our article will guide you from idea to fully fledged business.

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What are the advantages of being a sole trader?

There are a lot of benefits to being a sole trader. These are just a few of the biggest ones: 

• It’s easy and simple to get started. Unlike forming a limited company for example, you will have less paperwork and hoops to jump through to become a sole trader.
• You’re your own boss. You decide when, how and how much you’ll work. You don’t have to fake being sick or bend over backwards to fit in a doctor’s appointment here. It’s all under your control. 
• You call the shots. All decisions are yours – giving you the ultimate power and say of how your business is run. 
• You keep all the profits (after taxes!). The better your business does, the more you profit. 
• There is less admin and paperwork to do, giving you more time to focus on your business’s day-to-day operations. 
• It can be more cost-effective to run a sole tradership, as there are fewer legal and accounting requirements, which means less money spent on accountants or accounting software. 
• A more friendly option for clients. Some customers prefer dealing with individuals rather than companies – which could make you a more attractive option for your customers!

It’s easy to see why 60% of all small businesses in the UK are currently set up as sole traders.

What are the disadvantages of being a sole trader?

Being a sole proprietor isn’t for everyone. Although it’s easy to set up and run, you need to be aware of the drawbacks to being a sole trader. 

• You’re legally responsible for your own company, which means that any debts that your company may acquire are yours too. You can’t take all the profits and none of the debts I’m afraid. It works both ways. 
• You don’t have a fixed income. You make money from the company profits, rather than taking a traditional wage. So if business is slow, your wallet is going to start getting very light. 
• Higher profits mean more tax. The more profit you earn, the more you will owe in tax. Sole traders are responsible for paying Income Tax, Class 4 National Insurance and VAT (if registered). If your profits are high, you will end up paying ore in tax than a limited company. 
• Sole traders struggle to land big clients. Although you might seem friendlier to some customers, if you’re looking to land high-profile clients, they might see you as a little guy and dismiss your company over other limited company options. 
• You need help accessing finance, as certain business schemes and loans are unavailable to sole traders. If you’re looking for finance options, you may have to take out personal loans with higher interest rates. 
• You can’t sell the company. You are the company, which means that legally – no one else can own it. 

In addition, it can be harder for sole traders to get the work/life balance right. Because you don’t have a fixed wage, many sole traders forgo days off to secure their income, which can cause stress and burnout if you’re not careful.

What are the legal obligations of a sole trader? 

As a sole trader, you will be legally responsible for:

• Registering for self-assessment with HMRC and submitting your self-assessment returns every year
• Paying your Income tax and Class 4 National Insurance contributions 
• Registering for VAT (if required) 
• Registering for PAYE (if you employ others) 
• Checking for and acquiring any licences (such as selling alcohol, paying music in-store, or for the software you use) 
• Taking out any required insurance (such as employer’s liability insurance)

For the most part, being a benign sole trader just means keeping on top of your self-assessments and paying your taxes on time. The best way to do this is by investing in accounting software to keep your books up to date and make your returns a breeze.

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Do you have to pay National Insurance as a sole trader? 

Yes, as a sole trader, you need to pay Class 4 National insurance contributions. As we outline in our guide to National Insurance for self-employed, Class 4 contributions are calculated based on your income. 

• Annual income under £12,570 falls under a personal tax-free allowance.
• Annual Income between £12,570 and £50,270 is charged at a higher rate of 8%.  
• Annual income over £50,270 is charged 2%. 

Previously, sole traders had to pay both Class 4 and Class 2 National Insurance rates. However, Class 2 was abolished in 2024, allowing sole traders to keep more of their profits. 

Do you need to set up a business bank account as a sole trader? 

No, you don’t have to set up a business bank account as a sole trader. Technically, you can use your normal personal account unless you have a restriction that the account isn’t to be used for business use.

You better check out that fine print before you start making any transactions. 

However, setting up a dedicated business bank account can make your life much easier, as your cash flow will be much easier to manage. 

How do I set up a business bank account as a sole trader? 

Setting up a business bank account is similar to applying for a personal one. You’ll choose a bank, supply your personal details and business information, and then wait to get accepted. 

There are many options for choosing a bank account as a sole trader, with many banks also offering deals such as free accounting software to help you save money and manage your finances.

For example, NatWest owns FreeAgent and freely gives out subscriptions to the software with all new business current accounts. 

When looking at the business bank offers, you should remember that modern online banks like Tide should also be considered. Unless you really need to walk into a branch (when was the last time you did that anyway?), online banking solutions can be much faster and quicker to set up. 

If you don’t fancy going through the paperwork of setting up a bank account, then you’ll be happy to find out that many business formation agents can also apply on your behalf as part of their ‘Fast Track’ business bank account applications. 

Can you name your business as a sole trader? 

If you’re a sole trader, you can either do business under your own name or choose a name for your business.

This name doesn’t need to be registered with Companies House, but you do need to include them on all official paperwork that you produce, such as invoices and letters. 

There are restrictions over what you can name your business though. If you’re a sole trader you can’t: 

• Include ‘limited’, ‘Ltd’, ‘limited liability partnership’, ‘LLP’, ‘public limited company’ or ‘plc’ in the name, as you are not registered as those company structure types.
• Use offensive or ‘sensitive’ words. And yes, that does include the ‘F’ word. 
• Use an existing trademark. For good measure, we’d recommend checking the name you want against the list of registered trademarks before you start using it and make yourself liable for a lawsuit. 
• Suggest a connection to the government or local authorities, unless you get permission to do so. For example, if you want to use ‘Accredited’ in your company’s name, you need permission from the Department for Business, Energy and Industrial Strategy (BEIS).

If you want to make sure that no one else steals your brilliant new name, you can always register the name as a trademark yourself. 

Not sure where to start? Our guide to finding a catchy business name is here to help. We are going to take you through several steps that will come up with a broad range of company names. You can then simply choose the one you like best.

What’s the difference between a sole trader and self-employed? 

A sole trader is a type of business structure, meaning that the business is fully owned by a single person. Self-employment is a type of employment, which describes how you work (and what taxes you pay!). 

There’s a lot of overlap here, and you can be both things at once. The core difference between a sole trader and self-employed is that one term describes your business, while the other describes your personal employment status. 

Can a sole trader have employees?

Employing other people is a business action. Which means that sole traders can employ others. So despite the name ‘sole trader’, you don’t have to do everything alone.

A sole trader means that the business is owned and operated by yourself, but there are no restrictions on hiring employees if you want to grow and expand your business. 

To hire someone as a sole trader, there are two simple steps that you have to follow. First, you need to register as an employer with the HMRC. (Yep, you need to register everything with HMRC). 

Secondly, you must register for PAYE to pay your employees’ salaries. And trust us, you don’t have to be an accounting whiz to get PAYE right.

Setting up payroll isn’t as complicated as it used to be, as there are lots of software options to choose from that will automatically pay your employees using PAYE.

Some accounting software systems will also have payroll abilities as part of their services, allowing you to kill two birds with one stone. 

Looking for the right accounting software? Find out which accounting software is the best for UK sole traders with our tried and tested reviews here. 

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Can you lease a car as a sole trader? 

If you need a car for your business, consider taking out a business car lease. As a sole trader, you are automatically eligible for business car leases—unless you’re a taxi driver. With the high mileage standard taxis do, leasing a taxi would be incredibly expensive, so most brokers won’t offer it as a service. 

Instead of buying a car outright, leases give you the option to pay with monthly instalments that could better suit your budget and cash flow.

With business leases as a sole trader, you can expense your miles and reclaim your monthly VAT (if you’re VAT registered!). You don’t have to pay any company car tax either, potentially saving money. 

Find out more about leasing a car as a sole trader here. 

Do you need business insurance as a sole trader? 

Technically, sole traders aren’t legally obligated to have business insurance unless they are contractually obligated to, such as Professional or Public Liability Insurance, Cyber and Date insurance if you handle client data or employers’ liability if you hire employees. 

Even if none of the above applies to you, it can be useful to have business insurance to protect you against the worst and help you sleep a little better at night. Find out what types of business insurance you can have as a sole trader and if they will benefit your business here. 

How to pay tax as a sole trader?

As a sole trader you have to pay Income Tax on all your earning, minus allowable expenses. And National Insurance Contributions are also due. You do this via a Self Assessment Tax return.

To find out more, read our article about paying taxes as a sole trader.

You have to complete and submit this tax return every year. It’s boring and takes time and effort, but don’t be tempted to “forget” it. Because HMRC will fine you £100 for filing it up to 3 months late and more if it’s even later.

Doesn’t sound thrilling, right? To make sure that keeping your accounts in order doesn’t become a huge chore, we recommend using accounting software. We here at Business4Beginners use FreeAgent, which is suitable for sole traders as well as small limited companies.

But there are others available. Why not take our quiz to find the one that works for you?

What’s the difference between a sole trader and a limited company?

You might wonder if you are better off being a limited company, rather than a sole trader. Well to help you decide you need to know what the difference is between these two business structures.

One of the main differences is the legal status. A limited company is its own legal entity that is different from its owner or owners. This means that if the business runs into difficulties, for example financially, the personal assets of owners and directors aren’t at risk.

That’s what is meant when we talk about limited liability relating to limited companies. On the other hand, being a sole trader means being the business and only you. You can’t run a sole trader business with someone else.

It also means that you are fully liable for your business, so if it runs into financial problems, your personal assets will be at risk.

With this legal difference come other differences too:

• A sole trader is self-employed, a limited company owner is employed by the company
• A limited company can be sold, but a sole trader can’t sell their business
• A sole proprietor pays Income Tax on all earning, a limited company pays Corporation Tax
• Setting up as a sole trader is quick, easy and free, while setting up a limited company involves more paperwork and fees
• A limited company has to adhere to many rules and regulation, while a sole trader has less red tape to worry about
• Running costs for a limited company are higher than for a sole proprietorship

If you want to know more, read our article about the difference between limited company and sole trader.

Can you change from sole trader to limited company?

Yes, you can. Many people start out as a sole trader, because it’s the easier, quicker and more budget-friendly option. But as the business grows, it might be more appropriate to change to become a limited company.

When the time is right to change from being a sole trader to owning a limited company will depend on your individual circumstances. But the good news is that it’s easy and quick to do.

All you have to do is set up a limited company and let HMRC know about the change. Then you can start reaping the benefits of being a limited company.

If you are interested in learning more about making this switch, read our guide about changing from sole trader to limited company.

Although it’s a fairly easy process, it can feel a bit daunting. The good news is that help is at hand. Company formation agencies can do it all for you for a modest fee. All you have to do is give them the relevant information, and they do the rest.