Advantages & disadvantages of being a sole trader
Thinking about going self-employed and unsure which structure to choose? This guide walks through the key advantages & disadvantages of being a sole trader in England and Wales, so you can see how it works in practice before you decide. We will look at tax, risk, funding, admin and when it might be time to incorporate, all from an accountant’s perspective.
If you would like personalised support as a sole trader, our sole trader accountancy team can sense check your plans, help you get registered correctly, and keep you organised for tax. Our guide on setting up as a sole trader explains the key steps in plain English, so you know what to do next.
What is a sole trader?
A sole trader is an individual who runs a business in their own name. There is no separate legal entity, which means you and the business are treated as the same person in law. You can trade under your personal name or a business name, but all income and costs ultimately belong to you.
Who does a sole trader structure suits
First time self-employed and side projects
Many people first meet self-employment through freelancing, gig work or a side project alongside employment. In these situations, a sole trader structure offers low set up cost and straightforward admin. You register with HMRC, keep records, and file a Self Assessment return once a year. For small, flexible ventures where income may be irregular at first, that simplicity can be very attractive.
Freelancers and professional services with light assets
Consultants, designers, copywriters and other professional services often start as sole traders because their main asset is their time and expertise. Fixed costs are relatively low, and there may be no need for complex ownership structures or external investors. Staying as a sole trader keeps compliance lean while you test your market, build a client base and see how profits develop over a couple of years.
Local trades and personal brands
Plumbers, decorators, fitness trainers and other local trades often trade in their own name or a simple business name where the owner is the brand. A sole trader structure supports a direct relationship with customers. As long as borrowing, leases and staff numbers are modest, the balance between admin effort and control can work well, provided the owner understands the personal liability that sits behind the business.
Tax and National Insurance overview for sole traders
Income Tax on profits
As a sole trader, you pay Income Tax on your business profits, not on your turnover. Profits are calculated after allowable business expenses, then reported through a Self Assessment tax return each year. You normally benefit from the same tax-free Personal Allowance as other taxpayers, which is currently £12,570 a year before Income Tax applies, according to UK government guidance on income tax rates.
National Insurance contributions
You also pay Class 2 and Class 4 National Insurance contributions once profits pass certain thresholds. The rules can change over time, so it is important to check current rates and plan cash flow around the payments due on 31 January and 31 July if payments on account apply.
How your profit level affects the overall tax
For some profit levels, overall tax and National Insurance as a sole trader may be similar to, higher than or lower than the combined tax paid through a company and dividends. That is why accountants often run comparison scenarios once profits stabilise.
Records, Making Tax Digital and admin load
Record-keeping duties
Sole traders must keep clear records of income, expenses, invoices, bank statements and any other documents that support the figures on their tax return. HMRC requires self-employed people to keep records for at least five years after the 31 January submission deadline for the relevant tax year so that tax returns can be checked if needed.
Digital records and Making Tax Digital
In practice, that means keeping digital or paper records organised by tax year and backing up key documents. Making Tax Digital for Income Tax is being phased in, which will increase the focus on digital record-keeping and more frequent updates.
Keeping admin manageable
Using cloud bookkeeping software or structured spreadsheets can reduce stress at year-end, help you see monthly profit and keep your tax money ring-fenced. Compared with running a company, the admin load is lighter, but discipline still matters.
Do you need help?
Find out how our accounting team can guide you on being a sole trader
Advantages of being a sole trader
Quick and easy to set up and manage
Registering as a sole trader is simple and fast. You notify HMRC, set up basic bookkeeping, and you can begin trading straight away. With fewer legal formalities and no Companies House filings, the overall admin load stays manageable for most owners, which is one of the core advantages that being a sole trader often offers.
Low starting cost
There are no incorporation fees, no share capital requirements and no statutory accounts to produce. This keeps early overheads low, which is especially helpful when income is irregular or when you are testing a new business idea.
Keep 100% of the profit
As a sole trader, you keep all post-tax profit. There is no need to declare dividends or navigate the rules around director salaries. This clear link between your work and your reward is one of the reasons many people start as sole traders.
Flexible
A sole trader setup offers day-to-day flexibility. You can make decisions quickly, change direction without board approval, and adjust pricing or services as your market shifts. This agility is especially useful in the early stages of growth.
Privacy and less red tape
Sole traders do not file public accounts or confirmation statements, and your earnings are not displayed on a public register. Although you still need to maintain proper records and follow tax rules, overall, the process is lighter than running a limited company.
Disadvantages of being a sole trader
The disadvantages of being a sole trader often become clearer as the business grows and responsibilities increase.
Unlimited personal liability for debts
Because you and the business are legally the same person, business debts and certain claims can fall on your personal assets if things go wrong. Insurance and careful planning reduce exposure, but the legal risk remains fully with you as the owner.
Funding and growth limitations
Lenders may assess both personal and business income, which can restrict access to larger financing. Investors usually prefer companies, so scaling beyond a one-person operation can be harder when you trade solely under your own name.
Tax considerations
As profits rise, more income can fall into higher tax bands and more National Insurance may be due. With the Personal Allowance frozen until 2028, more income becomes taxable over time, which may prompt a comparison with limited company structures.
Succession considerations
A sole trader business can be harder to sell or pass on because it is tied to the individual. Without shares to transfer, continuity for customers and buyers is more complex, so planning ahead is essential.
Sale limitation
Selling a sole trader business can be challenging because the business is closely linked to the owner rather than being a separate legal entity. Buyers may see more risk and require stronger assurances, which can make the sale process longer and reduce potential valuations.
Might attract fewer clients
Some larger organisations prefer limited companies because they view them as more stable or better insured. This can occasionally limit opportunities even when your service quality and reliability are strong.
Harder to have time off
When you stop working, income often stops immediately, making holidays or illness more financially stressful. Without employees to share the workload, taking breaks requires planning to avoid gaps in service or cash flow issues.
When it might be time to incorporate
Growth patterns that signal a review
There is no precise turnover number that tells you when you must stop being a sole trader. Instead, accountants look at patterns. If your profits have grown and stayed at a higher level for a couple of years, or if you are hiring employees, signing longer leases, investing in equipment or seeking larger finance facilities, it is usually worth modelling an alternative structure.
Why incorporation becomes attractive
Incorporation can create a clearer line between business and personal risk, open up different funding options and allow more flexibility in how you pay yourself. On the other hand, it brings extra reporting, director duties and costs, including accountancy fees.
Case study
Business background
An anonymised self-employed mobile hairdresser in South Wales has been trading as a sole trader for three years. In the first year, income was irregular and seasonal, so the simplicity and low cost of being a sole trader suited the early stage of the business. They managed their own records, filed a Self Assessment return and focused on building a reliable client base.
What we did
By year three, profits were higher, and the owner was considering renting a small salon chair and hiring a part-time assistant. At this point, they asked us to review their numbers. We assessed how tax and National Insurance applied at the new profit level, the personal risk behind the rental agreement and any borrowing, and how lenders might view the business if additional funding was required. We also modelled projected outcomes as a sole trader versus a limited company.
The results
With the side-by-side comparison, the owner could clearly see the impact on take-home pay, risk and admin under each structure. They chose to remain a sole trader for another year while profits continued to stabilise, with a plan to revisit incorporation once they secured the rental space and confirmed demand for the assistant’s hours.
Wrapping Up
Choosing how to trade is about fit, not fashion. Understanding the main advantages & disadvantages of being a sole trader helps you decide whether its simplicity, control and privacy outweigh the trade-offs in risk, funding and tax as your business grows.
Once you know where you are in that journey, you can review your structure every year or two and adjust when profit levels, responsibilities and goals begin to change.
FAQs
Is it better to be a sole trader or a limited company in England and Wales
There is no single answer because the best structure depends on profit level, risk appetite and long-term goals. Comparing both options with an accountant using your real numbers is the easiest way to decide.
How much tax does a sole trader pay
Sole traders pay Income Tax on profits and Class 2 and Class 4 National Insurance when thresholds are met. Your exact bill depends on profit level and current tax rules, including the £12,570 Personal Allowance.
Can you employ staff as a sole trader?
Yes, you can employ staff as a sole trader if you register for PAYE and meet all employer responsibilities. Hiring staff does not require you to incorporate.
Do I need an accountant as a sole trader?
You do not have to use an accountant, but many sole traders find it helpful for tax, records and avoiding mistakes. Support becomes more valuable as profits grow or your business becomes more complex.
When should a sole trader think about changing structure
Rising profits, taking on employees or signing longer commitments often trigger a review. Checking your structure every year or two helps ensure it still fits your goals.
Whether you’re just starting out or running a growing business, we’re here to help with practical accountancy and tax support that matches your goals. Learn how we support UK business owners at Henry & Banwell Chartered Accountants, and get in touch for advice tailored to your situation.