What is a sole trader?

What does being a sole trader mean in practice?

It is the simplest way to be in business. You register with HMRC for Self Assessment, and that is the whole of the setup. There is no company to form, no Companies House filing, and no public record of your accounts. You can trade under your own name or a business name.

The business and you are the same legal person. Its income is your income, taxed through Self Assessment along with anything else you earn. Its debts are your debts, which is the part that matters if a job goes badly wrong — there is no limited liability shielding your house.

Money you take out is called drawings, not wages, and it is not an expense. You are taxed on the profit the business makes, whether you took it out or left it in the account. That single fact explains most of the confusion new sole traders have about their tax bill.

A worked example

A self-employed gardener invoices £48,000 in the year and spends £18,000 on the van, tools, fuel, insurance and materials. Profit is £30,000. Through the year she transfers £2,000 a month, £24,000, from the business account to her personal one. Those transfers are drawings, and they do not reduce the profit.

Her Self Assessment return shows £30,000 of profit, and income tax and National Insurance are worked out on that figure. The £6,000 she left in the business account is still hers, and still taxed, because for a sole trader there is nowhere else for it to be.

When does a sole trader go limited?

Usually for one of three reasons: the work carries enough risk that limited liability is worth having, customers or contracts require a company, or the profit has grown to where the tax position is worth a proper comparison. The tax comparison changes with every Budget, so it is a conversation to have with an accountant using current rates, not a rule of thumb.