Being a sole trader: 8 frequently asked questions

We know that operating as a sole trader can be confusing, so we’ve put together a list of FAQs to answer the questions you may have. ​

Yes, it’s relatively easy to switch to other business structures e.g. from sole trader to a company structure. Many people start as sole traders and switch to other business structures when they expand later. However, your decision needs to be well thought-out. What are the main reasons you want to change your business structure? Have you evaluated the possible disadvantages of the business structure you want to switch to? Do you know the tax implications and the money involved? Have you discussed it with your accountant? You need to have a basic understanding of these questions before deciding. ​

The main difference between a sole trader and being self-employed is that 'sole trader' describes your business structure; 'self-employed' means that you are not employed by somebody else.​

In saying this, there are essentially no differences between self-employed people and sole traders. This is because many people who are self-employed choose to operate their own business under the sole trader structure because it’s easy and cheap to set up. For example, freelancer designers and IT consultants are often sole traders. ​

Being a sole trader means that you have complete control over how you run your business and are responsible for everything that happens in it. However, if you run your business under a company structure, you’re not seen as self-employed. Instead, you’re the owner and the employee of your own business. ​

Read more: Should you class your business as a sole trader or a company?​

To set up and register as a sole trader, you need to:​

When the tax season comes around, here are some top tips to make life easier for sole traders:​

A sole trader business structure is taxed as part of their own personal income. This means sole traders are taxed at the Income Tax Rates and entitled to a tax-free personal allowance of £12,570 (this can be eroded when income exceeds £100,000). The current individual tax rates are:​

Please note, the Scotland tax brackets are different. You can view them here.
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Sole traders must also pay two types of National Insurance Contributions, Class 2 and Class 4.​

Class 2 contributions are £3.45 a week if profits are £6,725 or more a year (£179.40 in total if the sole trader was in business for the full tax year).​

Class 4 contributions must be paid if your profits are more than £12,570 a year.​

For the 2024/25 tax year class 4 national insurance is:​

At the end of the financial year, sole traders must file a self-assessment tax return by 31 January each year, if filing online.  If filing a paper return, you only have until 31 October to file your return. ​

Whether you need to charge VAT as a sole trader or not depends on if you’re VAT registered. The annual income threshold for registering for VAT is £90,000 in the UK. This means if your annual business income exceeds £90,000 or you expect to exceed this threshold, you must register for VAT. If your annual income doesn’t meet the threshold, registering for VAT is optional. ​

If you’re VAT registered, you’ll need to charge VAT at a rate of 20% on goods or services you sell. For example, if your hourly rate is £100, then you need to charge £120 to your customers (£100*1.2). However, you don't include VAT in the price if your product or service is VAT free. ​

Similarly, if you pay VAT when you incur business costs, the VAT gets refunded back to you by HMRC. ​

You’re also required to pay income tax on your taxable income. Rather than paying a lump sum at the end of the year, HMRC requires sole traders to make payments on account on 31 January during the tax year in question and 31 July immediately following the tax year in question. The amount payable via these payments on accounts is determined based on your tax bill for the previous year. ​

If you're self-employed as a sole trader or in a partnership, you don't have to pay into an occupational pension scheme for yourself. ​

However, it is important to consider whether you should start paying into a personal pension scheme. ​

Contributions to a personal pension scheme would be made after tax, meaning you contribute directly from your bank account into your pension. You can therefore claim tax relief from HMRC in relation to the pension contributions you make during the tax year. ​

It is worth discussing your options in relation to pension contributions with a financial adviser.​

In short, yes – as a sole trader you are permitted to hire employees. As an employer, you must comply with the legal obligations that any other employer has. This includes ensuring the people you hire are legally able to work in the UK, paying pension contributions to a pension scheme, ensuring they receive their entitlements and that your workplace meets the Workplace Health, Safety and Welfare regulations.​

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We have a dedicated team of remote accountants to take care of your business no matter where you are, so you can focus on growing your business. We take out the ‘fluff’, break down the barriers and get things done. Looking out for you is what we are all about. Register today.​