Small businesses are an essential part of the British economy, employing 13.3 million people and turning over £1.6 trillion per year. In the UK, a business is classed as small if it has fewer than 50 employees or an annual turnover of less than £6.5m.
More than 75% of British small businesses are sole traders, meaning they have no employees at all. Starting a business as a sole trader is designed to be as straightforward as possible. Still, it’s worth becoming familiar with your role and responsibilities before hanging out your shingle.
Here’s what you need to know.
What defines a sole trader in the UK?
Sole traders are self-employed and run their businesses as individuals without a complex business structure. If you earned more than £1,000 from self-employment in the last year, you must register as a sole trader.
UK business owners can also choose to form a business partnership or a limited company. In a partnership, two or more people or companies share responsibility for the business. A limited company allows you to legally and financially separate yourself from your business.
The major difference between a sole trader and an LLP or PLC is your personal liability if your business loses money or gets into legal trouble. As a sole trader, personal assets like your retirement savings or house are counted as business assets. If you are successfully sued or declare bankruptcy, these assets will be used to pay your creditors, legal bills and any award. In an LLP or PLC, only your business assets are counted.
The two primary responsibilities of a sole trader are keeping accurate records and paying taxes. Taking the time to do the former, will make the latter a lot easier.
You’ll need to keep good records for information such as:
- Sales and income
- Business expenses
- Personal income
- Payroll and tax withholding information for any employees
- VAT paid and received if you’re registered
You also need to keep all the paperwork for five years after submitting it, in case Revenue & Customs has questions about past tax returns.
Most of this record keeping can be done fairly easily using digital bookkeeping software like Xero, QuickBooks or FreeAgent. Or by hiring a bookkeeper or accountant to manage everything for you. To file taxes and pay your National Insurance, you’ll need to use the self-assessment tax return form.
What are the advantages of being a sole trader?
Operating as a sole trader has many benefits over trading as a limited company.
- You have complete control over business decisions and can keep all profit because you are not required to share with business partners or shareholders.
- No listing at Companies House means your address and annual turnover stay private.
- There’s less bookkeeping and compliance paperwork.
If your business grows and a limited partnership starts to make more sense, switching from operating as a sole trader to a different business structure is much easier than the other way around. Bringing on a partner or legally separating your personal assets from your business is definitely something you can do at a later date.
What is the difference between being self-employed and a sole trader?
The terms self-employed and sole trader are often used interchangeably, and in most cases, both terms apply. They mean different things to the tax office, however. Self-employment refers to how you pay taxes. If you’re self-employed, you use the Self Assessment system to pay your income tax and your contributions to National Insurance. If you’re employed, you are paid by a company and income tax and National Insurance is deducted at source via PAYE. Sole trader describes the structure of your business. Other business structure possibilities in the UK include partnership, LLP or PLC. Self-employed people can choose to work as part of a limited company or business partnership instead of operating as sole traders.
Do I pay tax as a sole trader?
Yes. You need to use the Self Assessment system to pay income tax on profits and National Insurance contributions. The first £1,000 you earn from self-employment is considered your “trading allowance” and is therefore tax-exempt, but otherwise, you’ll pay income tax at the same rate you would as an employee.
If your profits total between £6,515 and £9,569, you’ll pay Class 2 National Insurance, a fixed weekly payment currently set at £3.05. If your profit is greater than £9,569, you’ll pay Class 4 National Insurance, which is calculated as a percentage of your profits.
When you earn more than £85,000, you’ll need to register for VAT. This means you’ll charge customers VAT on your work and be able to claim back any VAT you pay when buying things for your business.
What are some examples of sole traders?
Most freelancers and contractors in the UK are sole traders. Traditional examples include hairdressers, plumbers, electricians, graphic designers, artists, tutors, and musicians.
Some examples of sole traders running digital businesses include copywriters, course creators, ecommerce entrepreneurs, online service providers, influencers, and coaches.
Can a sole trader in the UK have employees?
As a sole trader, you can hire employees. Hiring employees is a great way to grow your business, but it does require additional paperwork and comes with tax obligations. Here’s what you need to do:
- Register as an employer with HMRC within four weeks of making a hire
- Be sure that your employees can work legally in the UK
- Pay at least the National Minimum Wage and set up a pension scheme if your employees earn more than £10,000 per year.
- Write an employment contract and a statement of employment particulars, which lists the details of the position.
Accepting payments as a sole trader with Mollie
If you’re just starting out in business, working with the right partners can be crucial to getting set up and driving growth. At Mollie, that’s what we do – providing an effortless payments solution that is designed to support small- and medium-sized businesses on the path to success. Our effortless payments come with easy onboarding and no lock-in contracts or hidden fees. Find out more about payments with Mollie.