Sole traders
56% of businesses in the UK are classed as Sole Traders/Proprietors. That’s 3.1 million businesses owned and managed by a single, self-employed individual.
It’s the simplest structure to operate – sole traders are their own bosses and have complete control over all decisions. There are no shareholders, partners, or directors to manage, and they keep all profits (after tax and National Insurance). They don’t need to register with Companies House and the accounting requirements are less stringent.
Sole traders can trade either under their own name or under a company name. Company names don’t need to be registered but if a company name is used, both the owner’s name and the company’s name must be included on official paperwork (invoices etc).
Essentials Tip: SELF-EMPLOYED OR SOLE TRADER?
The terms Sole Trader and Self-Employed are often used interchangeably but they have slightly different meanings.
Sole Trader defines the structure of the business.
Self-Employed defines how the Sole Trader pays tax. They must register as self-employed with HMRC to pay income tax and National Insurance.
Common Examples of Sole Traders
It’s a common misconception that sole traders are generally limited to traditional trades like painters and decorators, builders, plumbers, and electricians. However, this category covers a much broader spectrum of the business market:
Note: these categories are used as an example. Individual sole traders may fit into one or more of the categories.
- Sole trader has complete control over all business decisions
- Its easy to set up with minimal start-up costs
- Sole trader keeps all profits
- There is minimum admin required around financial accounts
- Sole traders can employ staff and contractors
- Financial reports are not made public
- Sole trader is personally liable for all debts and losses
- Sole traders may end up working long hours alone
- It can feel harder for sole traders to take holidays
- Without public financial reports, it is difficult for sole traders to raise finances from traditional lenders
paying tax
Sole Traders pay income tax and Class 2 National Insurance contributions to HMRC via the self-assessment system. The tax year runs from April 6th to April 5th of the following year.
Individuals must register as sole traders with HMRC if they earn more than £1,000 from self-employment within a tax year.
While formal accounts don’t need to be kept, sole traders must keep track of all sales/business/personal income as well as any business expenses. Receipts, till rolls, cheque stubs, invoices and bank statements are used as evidence to support the self-assessment.
The tax is usually paid in two instalments, no later than January 31 & July 31 of the following tax year.
INCOME TAX
Individuals and sole traders are given a Personal Allowance that they can earn each year that is not taxable.
| Income Tax Rates & Thresholds (England, Wales and Northern Ireland) | ||
|---|---|---|
| Rate | 2021 – 2026 | |
| Personal Allowance | 0% | First £12,570 |
| Base Rate | 20% | £12,571 – £50,270 |
| Higher Rate | 40% | £50,271 – £125,140 |
| Additional Rate | 45% | Over £125,140 |
| Income Tax Rates & Thresholds (Scotland) | ||
|---|---|---|
| Rate | 2023/24 | |
| Personal Allowance | 0% | £0 – £12,570 |
| Starter Rate | 19% | £12,571 – £14,732 |
| Scottish Basic Rate | 20% | £14,733 – £25,688 |
| Intermediate Rate | 21% | £25,689 – £43,662 |
| Higher Rate | 42% | £43,663 – £125,140 |
| Top Rate | 47% | Above £125,140 |
Individuals and sole traders with earnings over £100,000 will see a reduction to their Personal Allowance by £1 for every £2 of income above the £100,000 limit. This means anyone with an income over £125,000 does not have a Personal Allowance.
National insurance
Anyone who is self-employed with profits of £12,570 or more a year will pay the Class 2 and Class 4 National Insurance rates. These are:
| Self-Employed National Insurance Rates | |
|---|---|
| Class 4 | £3.45 a week |
| Class 4 | 9% on profits between £12,570 and £50,270 (between the Lower and Upper Profits Limit) |
| Class 4 | 2% on profits over £50,270 (above the Upper Profits Limits) |
If their profits fall below the Small Profits Threshold (£6,725 in 2023/24), someone who is self-employed will not have to pay Class 2 National Insurance.