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Being a sole trader: 8 frequently asked questions

a man having an accounting meeting with his accountant via phone in his botanic plant shop

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.

1. Can I switch to other business structures in the future?

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. 

2. What is a sole trader and what’s the difference between being self-employed?

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. 

3. What are the registration requirements if I run my business as a sole trader?

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

  • Request a self assessment unique tax reference (UTR)
  • Know your national insurance (NI) number or register for an NI number if you’re moving to the UK to set up a business
  • Register for VAT if your business activity turnover is over £85,000 annually
  • Register for self assessment by 5 October following the tax year in which you start trading. 

4. How do I deal with the tax season as a sole trader?

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

  • Claim business-related expenses
  • Separate your business and personal bank accounts
  • Understand your tax obligations
  • Put money aside to pay for tax
  • Keep good accounting records using cloud-based accounting software (e.g. Xero)
  • Hire a good accountant (e.g. Beany accountants)

5. How much tax does a sole trader pay in the UK?

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. From 6 April 2022, individual tax rates are below:

uk individual tax rates

Sole traders must also pay two types of National Insurance Contributions, Class 2 and Class 4.

Class 2 contributions are £3.15 a week if profits are £6,725 or more a year, being £163.80 if the sole trader was in business for the full tax year. 

Class 4 National Insurance tax rates are below:

Class 4 national insurance tax rates

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.

6. What are the tax obligations for sole traders?


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 £85,000 in the UK. This means if your annual business income exceeds £85,000 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. 

Income Tax

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. 


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7. How do pension contributions work for sole traders?

Pension contributions

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.

8. Can I hire staff when I’m a sole trader?

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.

Who are Beany?

We’re an online accounting firm that is always right here for you, your accounting pain relief. The most advanced technology lets us work way more closely with you than a normal accountant would.

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. Get started for free today.

Tori as a dog

Tori Ma

Performance marketer

Performance marketer at Beany, and into true crime documentaries.

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