What is a sole trader?

Many small business owners choose to operate as sole traders, especially early on. This enables the owner to make quick decisions and stick to their vision without shared responsibility, separate liability or the legal complexity of a partnership or limited company. Here’s what you need to know to decide whether it’s right for you.

Key takeaways

• A sole trader is a self-employed individual who owns and operates their business

• Sole traders keep all profits after tax but take full responsibility for debts and liabilities

• Set up is quick, with fewer reporting requirements than a limited company

What is a sole trader?

A sole trader runs their business on their own: they don’t share responsibility, as they would in a partnership, nor is their business considered as a separate legal entity as it would be with a limited company. The owner is the business, meaning they make all decisions and take full personal and financial responsibility if things go wrong.

Many sole traders work in service-led industries. Common types include freelance writers, graphic designers, web developers, plumbers, builders and electricians. Many independent retailers might be sole traders, too, especially market traders or those selling their handmade goods online.

Key features of running a business as a sole trader include:

• Full control: You make all business decisions

• Simple setup: Minimal paperwork, low start-up costs

• Personal liability: You are responsible for any business debts

• Full retention of all profits: After tax, profits go to you

• Taxed as an individual: You pay income tax and National Insurance on profits

• Fewer reporting requirements: Less ongoing admin than with limited companies

• Flexible branding: Trade under your own name or a business name

How to get started as a sole trader

One key advantage of being a sole trader is the ability to start immediately. You don’t need approval from HMRC or Companies House, and you don’t need to wait for a specific date as with other types of business.

Whether you’re growing a side hustle or launching a new venture, here’s how to get started.

1. Decide if the sole trader structure fits

Ensure full responsibility and liability suits your business goals and risk tolerance.

2. Choose a business name

Trade under your own name or a business name. You’re free to choose the name you like as long as it’s not offensive or misleading. For example, don’t pick a name that suggests an affiliation with the government if you don’t work with it.

3. Register with HMRC

Tell HMRC you’re self-employed so you can pay income tax and National Insurance on your profits. Do this as soon as you can, and no later than 5 October in your second tax year. For example, if you begin trading in 2025, you must complete the registration process by 5 October 2026.

4. Keep financial records

Track income, expenses and receipts for your self-assessment tax return. Accounting software can help simplify this process.

5. Set up a separate bank account

Get a dedicated bank account to manage finances and simplify tax preparation. This is optional, but can be incredibly helpful.

6. Check your insurance needs

Depending on your work, take out business insurance cover such as public liability, professional indemnity or business equipment insurance. If you employ anyone other than close family – including seasonal or temporary staff – employers’ liability insurance is a legal requirement.

7. Check for licences or permits

Apply for any required licences, especially if you work in regulated sectors such as food or childcare.

Advantages and disadvantages of being a sole trader

Sole trading offers speed and minimal red tape, but it also comes with drawbacks. Weigh up these pros and cons to decide whether this structure is right for you.

Advantages

• Keep full control: You make all business decisions without needing approval from the board or partners

• Keep all profits: After tax, the owner can retain everything the business earns

• Set up easily: You can register with HMRC quickly and easily, with minimal paperwork

• Maintain privacy: Unlike limited companies, which must provide some details to the public, most business details are private

• Adapt quickly: A sole trader can respond to changes without formal processes or approvals

Disadvantages

• Full liability: The owner is personally responsible for all business debts and legal issues

• More difficult to raise finance: You face more scrutiny from lenders, who may see sole traders as higher risk

• Handle all responsibilities: You manage every aspect of the business alone, without partners or directors

• No income when you’re not working: You won’t earn anything if you’re sick or take time off (although some insurance policies, such as self-employed insurance, can help)

• Growth limits: It can be more difficult to scale up your operation without external investment or a larger team

Responsibilities of being a sole trader

While sole traders face fewer responsibilities than owners of a limited company, the role still carries important obligations. Your exact duties depend on your business and its activities, but here are the key areas to manage:

Accurate financial records

You must track income, expenses and receipts for tax purposes. Use a spreadsheet or accounting software to stay organised and simplify your tax return when the time comes.

Budget for tax bills

Get into good habits and set aside money throughout the year to cover tax and National Insurance payments.

Self-assessment tax return

File your return annually and pay any tax owed by the deadlines. For the 2025/26 tax year:

• Tell HMRC by 5 October if you need to file a return for the first time;

• Submit a paper return by 31 October 2025, or;

• Submit an online return by 31 January 2026;

• Pay any tax due by 31 January 2026.

National Insurance contributions

Pay National Insurance based on your profits. You can see whether you owe Class 2 and/or Class 4 contributions, along with the current rates, on HMRC’s website.

Comply with relevant regulations. Follow industry-specific rules around licences, permits and health and safety standards if required.

Invoice clients and manage payments

Send invoices, follow up on payments and manage your cash flow. Staying on top of this supports the financial stability of your business.

Arrange business insurance if needed. Get suitable cover, such as public liability or professional indemnity insurance. If you employ anyone – even temporary staff – you must take out employers’ liability insurance unless you only employ close family members.

Register for VAT if required

Register if your turnover exceeds the VAT threshold. This is currently £90,000 as of 2024/25 but could change, so keep an eye on it.

Protect customer data. Follow data protection laws if you handle personal information. Failing to do so could result in serious fines.

Is becoming a sole trader the right choice for you?

Becoming a sole trader gives you simplicity, control and low start-up costs, but also places full responsibility on you. If you value independence and want to start quickly, this structure may be a good fit. Weigh up the pros and cons against your goals, risk tolerance and the type of work you do, and ask yourself the right questions to determine whether it’s suitable for you.