Is it cheaper to be a sole trader?

It might be cheaper to be a sole trader due to changes to the tax system

Woman researching financial support measures
(Image credit: Oscar Wong via Getty Images)

Something strange is going on with small businesses. Data published last week by the Office for National Statistics shows that the number of sole traders in the UK fell 4% last year – and has now declined 11% since 2019; by contrast, the number of small-business owners operating through companies rose 1% in 2023 and is up 4% on five years ago. The data feels counterintuitive because tax changes have made it progressively less attractive to run your business through a company structure in recent years.

In other words, some small-business owners may be paying more tax than they need to – possibly, say small-business experts, because the rules are poorly understood. Certainly, there are advantages to incorporating your business rather than operating as a sole trader. In particular, company owners aren’t usually personally liable for losses or liabilities incurred by their businesses, unlike sole traders. A company structure can also make it easier to navigate the IR35 rules on disguised employment, which have made life more difficult for contractors in recent years.

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David Prosser
Business Columnist

David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.