What Is a Sole Trader in the UK?
In the UK there are different business structures to suit different kinds of businesses, like sole trader, partnership and limited company. A sole trader business is owned and run by a self-employed individual.
It may be useful to think of the ‘sole’ element as referring to the single identity of the business and the individual. The two are bound together by definition. The business isn’t a separate legal entity.
As a sole trader, you are completely responsible for the success or failure of your business. The downside of this is that you’re personally liable for all business debts. The upside is that you keep all your profits yourself (after tax, of course).
Here's What We'll Cover:
Is a Self-employed Person a Sole Trader?
The terms self-employed and sole trader have slightly different definitions, but they usually go together and are often used interchangeably.
Sole trader is the structure you’re using for your business. Self-employed defines how you pay tax.
People who are self-employed use the self-assessment system to pay their income tax and National Insurance contributions (NICs). You're not registering as a sole trader—you're registering as self-employed in order to pay tax and NICs.
Obviously, it also means that you’re your own boss! Although you can also be self-employed as part of a business partnership or limited company.
What Defines a Sole Trader?
You need to define yourself as a sole trader and register with HM Revenue and Customs (HMRC) when you earn over £1,000 from your self-employed work in a tax year. This means that you can also make Class 2 NICs payments, which most sole traders pay voluntarily to make sure they maintain their access to benefits.
Some people want to have proof of their self-employment. For example, if they need to claim tax-free childcare, or are getting their finances in order to apply for a mortgage.
Sole trader status is the simplest business structure to operate. You don’t have to register with Companies House. There are no shareholders, directors or partners to handle. You control the operation and direction of your business yourself. Of course, there are regulations to follow and liabilities to meet.
What Is an Example of a Sole Trader?
There are lots of different kinds of sole traders. Some people think it's limited to those with traditional trades, like plumber, electrician, decorator and builder. Most of us have experience of at least one sole trader business in this capacity.
But that's not all.
Freelancers of all kinds would also be classed as sole traders—like graphic designers, writers, search engine optimisation (SEO) experts, to name but a few.
Other services are often run by a sole trader business. This would include tutors, hairdressers, mechanic, and interior designer. Anyone who is using their skills and knowledge to provide a service is usually a sole trader.
If you run an online business, you also belong on this list. And that's an even broader spectrum, with everything from selling handmade jewellery to online consultancy.
Can a Sole Trader in the UK Have Employees?
Yes, a sole trader can have employees—it doesn’t mean that you have to work alone. If you decide to hire employees, there are a few things you have to do straightaway.
Your employees must have the legal right to work in the UK, and it’s up to you to check this.
You must also get a Disclosure and Barring Service (DBS) check, if it’s a legal requirement. There are different rules depending on which UK country you’re in, and there are different levels of check you can request.
If you do criminal record checks on your applicants, you must have a policy on the recruitment of ex-offenders. Don’t panic, this is a requirement, but a sample policy is available from the DBS website. Checks on criminal history are usually only needed in certain industries, like security and the care of children or young people.
Your Responsibilities As an Employer
- Arrange employers' liability insurance.
- Decide on a salary for your employees. This must be at least the National Minimum Wage. The amount is different for different types of job and different age groups. You’ll need to be completely clear about this as it’s a criminal offence to pay less.
- Figure out if you need to set up a workplace pension scheme for your employees. This usually kicks in from when they’re earning £10,000 a year.
- Create a written 'statement of employment particulars,' which are essential for anyone you’re taking on for more than one month.
- Write your contract containing the job’s terms and conditions. This is a separate document from the statement of employment particulars.
- Register as an employer with HMRC. You’ve got up to four weeks before you pay your new staff to get this done.
Responsibilities of Being a Sole Trader
As with any business structure, sole traders have a set of legal responsibilities that each come with their own specific set of regulations.
Pick a Name
Even as a sole trader, choosing your business name has some restrictions. It can be your name or a separate business name, and it must be on all your paperwork—like invoices. As a sole trader you must not include: ‘Limited’, ‘Ltd’, ‘limited liability partnership’, ‘LLP’, ‘public limited company’ or ‘plc.' These are all legal terms that describe other specific business structures.
To be clear, you don't need to register your business name with Companies House, but you do have to adhere to the naming legislation.
You can’t have the same business name as an existing trademark. This is probably quite unlikely, but you also can’t include any offensive words in your name.
There are other lists of ‘sensitive words and expressions’ that you cannot use unless you get the necessary permissions from professional organisations. FreshBooks takes an in-depth look at naming sole trader, partnership and limited company businesses on this information page.
Register With HMRC
If you’re self employed, you need to register to pay your income tax through the self-assessment system. When you set up as a sole trader, you need to tell HMRC by registering for self-assessment. This means that you send an annual self-assessment tax return, enabling you to declare your earnings and expenditure, and work out the tax on your profits. You can also pay your Class 2 National Insurance contributions through your tax return.
Deadline warning: You must register for self-assessment by the 5th October in the second tax year of your business’s life. A UK tax year runs from the 6 April one year, to 5 April the following year.
How Do I Register for Self-Assessment?
If this is the first time you’ve registered for self-assessment, there is an extra step for you to complete. It’s important to be aware of this from the start, as you’ll need to allow a bit more time before you can submit your self-assessment tax return.
The vast majority of UK self-employed taxpayers use HMRC’s online self-assessment service. It’s a step-by-step process, which ends with another waiting period. For added security, HMRC sends an activation code for your new self-assessment account, which takes about 10 days to arrive. You won’t be able to use your account until you input the code, but you only need to do this the first time.
Sole traders need to keep a careful eye on HMRC deadlines: There are always fines for late filing and late payment of tax bills. If you're recently self-employed and are used to the pay as you earn (PAYE) system of paying tax, this can take a bit of getting used to.
As a sole trader, you might be wise to get professional help with your tax situation, just to make sure you're not making any mistakes. HMRC have penalties for that as well.
Keep Accurate Records
FreshBooks takes the usual headache out of this one for you. We'll put all your business records and necessary evidence in order.
That includes everything HMRC requires: All sales, business income, business expenses, and personal income. And the receipts, till rolls, cheque stubs, invoices, bank statements, and bank slips you need as evidence.
Then you've got additional PAYE records if you become an employer, and value added tax (VAT) records if you become VAT registered.
Lots of small business owners find these details to be the worst bit of running their own business. But not with FreshBooks. You just need to input the information and FreshBooks sorts it, generates reports, and has everything ready for tax time.
For your business, the record keeping and financial analysis is taken care of. We want you working for your clients, not wasting time sorting out your business paperwork. And we're certain that's where you want to be too.