Glossary · UK
What is Sole Trader?
The simplest legal structure for running a business, where one individual owns and runs the business personally and has unlimited personal liability for its debts.
Full Definition
A sole trader is a self-employed individual who owns and runs their business personally, rather than through a separate legal entity such as a limited company. It is the simplest and most common way to start a business in the UK: there is no need to register with Companies House, and set-up simply requires registering with HMRC for Self Assessment once trading income exceeds the relevant threshold. Legally, the business and the individual are the same person, so a sole trader keeps all the profits after tax but also has unlimited personal liability, meaning personal assets such as a house or savings can be at risk if the business cannot pay its debts. Sole traders pay Income Tax on their business profits through Self Assessment, alongside Class 4 National Insurance on profits above the lower profits limit, and (since the abolition of most Class 2 liability) may also choose to pay voluntary Class 2 contributions to protect their State Pension record if profits are below the small profits threshold. Many sole traders later incorporate as a limited company once profits grow, since a company structure offers limited liability and can be more tax-efficient at higher profit levels through a mix of salary and dividends, though it brings additional filing and administrative obligations.