What is sole trader in UK?

In the UK, a person who manages a company independently and is accountable for it individually is referred to as a sole trader. This refers that the person is in charge of running the company and is accountable for any business-related debts and losses as well as for maintaining all earnings. The individual must file a self-assessment tax return with HM Revenue and Customs as a sole trader and pay income tax and National Insurance payments on business earnings.

Sole traders in the UK can operate in a wide range of industries and can work from home or from a physical business premises. They are not required to register their business with Companies House or appoint directors or shareholders, unlike limited companies. However, they are required to keep accurate financial records and file a self-assessment tax return each year.

Some advantages of operating as a sole trader in the UK include flexibility, low start-up costs, and direct control over the business or company in the UK. However, some disadvantages of sole-trader include unlimited personal liability for business debts, difficulty in accessing financing or loans, and potential tax inefficiencies compared to other business structures.

Here are some more details about operating as a sole trader in the UK: how to register, how to main accounting, taxes, business expenses, liability, and scalability of the business.

You can register as a sole trader in UK, the individual must inform HM Revenue and Customs (HMRC) that he or she is self-employed now. This can be done by applying it online on HMRC website or by phone. Once you are registered with HMRC, you will get the unique tax reference UTR number and must file self-assessment tax return every year in UK using UTR number.

Accounting and bookkeeping: As a sole trader, it’s important to keep accurate financial records to make tax reporting easier. This can include keeping receipts, invoices, and bank statements. Many sole traders use accounting software or hire an accountant to help them manage their finances.

Taxes: Sole traders in the UK are required to pay income tax and National Insurance contributions on their business profits. The tax rates and thresholds can change each year, so it’s important to stay up-to-date with the latest tax rules.

Business expenses: Sole traders can claim tax deductions on eligible business expenses, such as office rent, travel expenses, and equipment purchases. However, it’s important to ensure that expenses are genuinely related to the business and are not personal expenses.

Liability: One of the major risks involved in operating as a sole trader in UK is unlimited personal liability  for business debts. It means that if a business (sole trader) cannot pay its debts, the individual who owns the business and his personal assets or savings are at risk. Sole trader must have appropriate insurance which covers their assets or home or savings. One must carefully manage the business finances to avoid any excessive debt.

Scaling the business: While many successful businesses in the UK are operated as sole traders, some entrepreneurs may eventually want to consider other business structures, such as a limited LTD company, if they plan to scale their business. Limited companies offer greater protection from personal liability and can be more tax-efficient in some situations, but they also involve more administrative complexity and costs.

More questions and answers on sole proprietorship are provided below. If you still have a question, post a comment and we’ll do our best to respond.

Table of Contents

Who is Sole Trader?

A sole trader is an individual who runs their own business as a self-employed or sole trader person in UK. The sole trader owns and manages the business, takes all the profits, and is personally responsible for any debts or losses incurred by the business.

Who can become sole trader?

Anyone who is legally permitted to work in the UK or has permanent residency PR can become a sole trader. However, some professions such as solicitors and accountants have additional legal requirements

What is the difference between sole trader and self employed?

Sole trader and self-employed are often used interchangeably, but there is a subtle difference between the two. Self-employed refers to a broader category of workers who work for themselves but may not necessarily have a business structure. A sole trader, on the other hand, refers specifically to an individual who owns and manages a business.

What are the advantages and disadvantages of sole trader?

Advantages of being a sole trader include complete control over the business, simple setup and administration, and the ability to keep all profits. Disadvantages include unlimited personal liability for business debts, the burden of managing all aspects of the business, and difficulty in obtaining financing.

advantages and disadvantages of sole trader?

Is sole trader a limited company?

Ltd or Limited companies are different from sole trader businesses. Ltd companies have limited accountability for their obligations like debts or outstanding and LTD companies are considered independent legal entities from their directors or shareholders.

Can sole trader hire employees?

Yes, sole trader can hire full-time, freelancers or contract based employees for their business. However, it is the responsibility of sole trader to verify the work eligibility of employees sole trader owner is hiring for its business that the employees has proper rights to work in UK.

Does sole trader need to register for VAT?

As per HMRC if a sole trader business’s annual turnover exceeds the VAT threshold which is  £85,000, owner must register for VAT with HMRC. But sole trader may also have the option to register for VAT even if their business threshold is less that £85,000 in a year.

Which software I can use for accounting for sole trader?

There are many UK accounting software options available for sole traders, such as Xero, QuickBooks, and FreeAgent. These software programs can help sole traders with expenses, invoicing, bookkeeping, and many more features.

What are sole trader expenses?

While running a business as sole trader involves some business expenses to run the business peacefully. Type of business expenses which sole trader can claim as business expenses which will reduce the amount of tax payable by the sole trader to HMRC. Type of business expenses which are eligible to claim are office rent, equipment, machinery, travel expenses, and wages for any employees hired for the business.

Sole trade expenses

Can sole trader apply bounce back loan scheme BBLS?

Yes, sole traders were qualified to apply for the bounce back loan scheme (BBLS) of the UK government during the epidemic.  Through this scheme, authorized sole traders can obtain a loan of up to £50,000 with a complete government guarantee.

How does bookkeeping works for sole trader?

Sole trader must maintain his accounts books and keep track of all the sales or expenses done for this business. These accounts books will help sole trader to file a tax return and track the success of the business. This way sole trader can track all the expenses done for business, profit generated, or any wages paid to the employees.

Can sole trader be a VAT registered?

Yes, a sole trader can register for VAT voluntarily, even if their annual turnover is below the VAT threshold which is £85000. Registering for VAT may provide some benefits, such as the ability to reclaim VAT on purchases made for the business.

Does sole trader need director ID?

No, a sole trader does not need a director ID as they are not a company director. A director ID is required for a LTD company directors in the UK.

Can sole trader apply for business loan in UK?

Yes, sole trader in UK can apply for business loan for its business purpose but lending company may also require sole trader’s personal credit score. As sole trader is personally liable for its business debts and any outstanding so it will be challenging for sole trader to secure a loan as compared to limited company in UK.

Also read: CA3916 Statement

Business loan in uk

How does sole trader pay taxes in UK?

A sole trader is required to pay taxes on their business profits through the self-assessment tax system in the UK to HMRC. This involves completing an annual tax return and paying income tax and National Insurance NI contributions on any profits earned during that year. For more details on self assessment tax return contact us or comment below.

Why sole trader better than partnership?

There are advantages and disadvantages to both sole trader and partnership business structures, and the choice will depend on individual circumstances. Some advantages of being a sole trader include simplicity, lower start-up costs, and complete control over the business. Some advantages of a partnership include shared responsibility and expertise, shared workload, and potentially greater access to funding.

Can sole trader take car on lease?

Yes, a sole trader in the UK can take a car on lease for business purposes. However, sole traders should consider whether this is a cost-effective option for their business or not and ensure they understand the terms and conditions of the car company lease agreement before taking the car.

Sole trader required an accountant?

A sole trader is not legally required to hire an accountant, but it can be beneficial to seek professional advice and support from an accountant to ensure the business complies with HMRC tax regulations, manage finances, and make informed decisions for its business. Comment below if you have any query or contact us.

How to check sole trader company number?

You can check sole trader’s details like name and registration number on UK companies house website. You’ll see the unique tax reference (UTR) number given by HMRC to the sole trader to identify the business for tax purposes.

Can sole trader employ his or her spouse?

Yes, a sole trader can employ their spouse or friends (full-time or contract basis) as an employee to work for their business. Sole trader must comply with UK employment laws and pay their spouse at least minimum wage for the work done.

How sole trader works?

As a sole trader, the individual is responsible for running the business and is personally liable for any debts incurred. The sole trader keeps all profits made by the business, but they are also responsible for paying income tax and National Insurance contributions on their business profits. A sole trader must keep accurate financial records and file a self-assessment tax return with HM Revenue and Customs each year.

Also read: Corporation Tax Reference Number

How sole trader works

Why to change from sole trader to limited company?

There are several reasons why a sole trader may choose to change their business structure to a limited Ltd company. Some of the most common reasons include wanting to limit personal liability for business debts, improving credibility with customers and suppliers, and accessing additional sources of finance.

When to change from sole trader to limited company?

The decision to change from a sole trader to a limited company will depend on individual circumstances, such as the size and growth potential of the business, the level of personal liability the sole trader is comfortable with, and tax considerations. It’s recommended to seek professional advice from an accountant or business advisor before making this decision.

When does sole trader need an abn?

HMRC assign a Unique Taxpayer Reference (UTR) number to sole traders in the United Kingdom, which is used to identify the firm for tax reasons.

Can you be a sole trader without UTR?

Yes, you can run your sole trader business in the UK without the UTR number. However, it is not recommended by HMRC as UTR number is mandatory to file your self-assessment tax returns.  And if you don’t have UTR number you may have to pay fines or penalties.

How does sole trader file taxes?

As a sole trader in the UK, the individual must file a self-assessment tax return each year to report their business profits and pay income tax and National Insurance contributions on those profits. The self-assessment tax return is usually filed online by the deadline of January 31st following the end of the tax year. The sole trader will need to keep accurate records of their business income and expenses throughout the tax year to complete their tax return.

How to close sole trader business?

To close a sole trader business, the individual will need to inform HM Revenue and Customs that they are ceasing to trade and complete their final self-assessment tax return. They will also need to settle any outstanding business debts and close down their business bank account.

Can sole trader pay wages to himself?

Yes, sole trader can pay themselves wages or salaries from their business profits. However, it is the sole trader’s obligation to ensure that they have adequate funds to continue their business and pay HMRC taxes on the profits.

Can sole trader claim back VAT?

A sole trader can apply for a VAT refund or claim back from HMRC if his business is registered for VAT

Does sole trader need a business bank account?

While it’s not a legal requirement for a sole trader to have a separate business bank account, it’s highly recommended to help keep personal and business finances separate and make accounting and tax reporting easier. Comment below if you have any query.

Can sole trader operate two businesses in UK?

Yes, a sole trader can operate multiple businesses in the UK as long as they are registered with HM Revenue and Customs for self-assessment tax and sole trader has a UTR number and also comply with all relevant regulations and laws for each business.

Can sole trader work for another full-time job?

Yes, a sole trader can work for another full-time job while also running their business. But they must ensure that they comply with any terms and conditions of their employment contract and have enough time and resources to manage their sole trader business effectively. For any query comment below and we can guide you.

How to become sole trader in UK?

You need to follow below steps if you want to become self employed or sole trader in UK: 
1. Choose a business name: select a unique business name
2. Register with HMRC: register with HMRC as self employed individual 
3. National Insurance: register for NI contributions 
4. Maintain Records: keep accounts books upto date like income, expenses, and other financial transactions.
5. Reporting tax to HMRC:  submit your self assessment tax return and calculate the tax your owe to UK HMRC.

What are sole trader examples names?

Examples of sole trader business names can vary widely, as they can be based on the owner’s name, a description of the business, or a combination of both. Here are a few hypothetical examples:

John’s Plumbing Services
Lucy’s Catering
Smith & Sons Electrical
Creative Designs by Emily
Green Thumb Gardening

What are sole trader features?

Some features of being a sole trader include:

Simplicity: Setting up and running a sole trader business is generally straightforward, with minimal legal and administrative requirements.

Full control: As a sole trader, you have complete control over your business decisions and operations.

Personal liability: You are personally responsible for all business debts and liabilities. There is no legal distinction between your personal assets and those of the business.

Tax advantages: Sole traders may benefit from certain tax deductions and allowances available to self-employed individuals.

How to use sole trader tax calculator?

To calculate taxes as a sole trader, you can use the HMRC’s self-assessment tax calculator available on their website. It will help you estimate your tax liability based on your business profits and other relevant factors.

What are the disadvantages of changing from sole trader to a ltd company?

Disadvantages of changing from a sole trader to a limited company include:

Increased administrative burden: Operating a limited company generally involves more paperwork and legal responsibilities compared to being a sole trader.

Legal formalities: Establishing a limited company requires registering with Companies House, maintaining statutory records, and adhering to company law regulations.

Higher costs: Limited companies are subject to additional costs such as annual accounts preparation, filing fees, and potentially higher accountancy fees.

Greater public scrutiny: Limited companies must disclose certain information publicly, including annual financial statements and details of company directors.

What is the best bank in UK for sole trader account?

Choosing the best bank for a sole trader account in the UK depends on your specific needs and preferences. Some popular options known for their sole trader services include:

Lloyds Bank
It’s advisable to compare the features, fees, and benefits offered by different banks to find the one that best suits your requirements. Consider factors such as online banking capabilities, transaction fees, account management tools, and customer support.

DISCLAIMER: We have written the UK accounting and tax related details for your information only. For professional advice or for any accounting task you require, you may need to speak to a professional accountant near you who can assist you. Please read our disclaimer for more details.