Sole Trader Insurance

To put it simply, a sole trader refers to someone that is a sole owner of a business. The phrase is used to explain a business structure, much like you could describe a business as a ‘business partnership’ or ‘limited company’.

Of the different types of business structure, a sole trader is the simplest kind, meaning the individual is only responsible for paying tax on profits and taking on any losses that the business makes.

The terms ‘self-employed’ and ‘sole trader’ have very similar definitions but the main difference is that ‘sole trader’ is used to describe a business structure, whereas ‘self-employed’ can be used to describe someone that doesn’t work for an employer or pay taxes through PAYE.

This would mean that you can be both a self-employed professional and a sole trader, because both terms essentially refer to someone being the sole owner of a business.

Explaining it in a real-life scenario; a freelance electrician would be considered ‘self-employed’, and they would need to register themselves officially as a ‘sole trader’.

This is a common misconception, because you’re actually able to employ people and remain as a sole trader. Just because a sole trader is deemed to solely manage the business on their own, that doesn’t mean that they have to work alone in order to maintain your status.

This is also why, for some sole traders, having an employer’s liability insurance policy is a legal requirement. It’s also important that sole traders follow employer rules and register as an employer with HMRC.

You can find out more on this topic from reading our blog: Can a Sole Trader Have Employees?

Yes, sole traders are legally required to pay National Insurance, as long as they are over the age of 16 years old and make over a certain amount of profits. How much sole traders owe in National Insurance is based on how much profit their business makes.

There are two NICs (National Insurance Contributions) classes that sole traders need to be aware of:

• Class 2: weekly rate of £3.45 throughout if sole trader earns more than £11,908 in profit in the 2023/24 tax year.
• Class 4: a percentage of sole trader profits are paid if sole trader earns more than £12,570 in profit in the 2023/24 tax year.

Take a look at our blog on National Insurance and learn more about what contributions self-employed works and sole traders are required to make.

Do sole traders need Employers' Liability Insurance?

Whether you need employers' liability insurance cover or not depends on, ultimately, whether you have employees or not. If you work by yourself or only employ close family members, you're not required to have employers' liability cover. On the other hand though, if your business does employ people, then yes, you are required to get an employers' liability policy.

If you're still unsure of how employers' liability insurance works and whether you need this additional cover, you can always contact a member of our team who would be more than happy to offer their professional advice so you can get the clarity you need.

Public liability insurance cover is perhaps the most important insurance for sole traders. Although it's not required by law to have public liability insurance, for many sole traders, they prefer to have this cover in place so that they can counter the many risks that come with conducting their business activities.

Any work that sole traders do, whether it's on their own business premises or out on the road, could unfortunately and unexpectedly impact anyone, including clients or the public.

What if the work your business does leads to someone being accidentally injured, or causes property damage? Legal action and compensation pay outs could follow, which could also prove to be financially harmful for your business.

Fortunately, that's where public liability cover can help, minimising the impact of claims made against you and your business when something goes wrong. That's why, of all the types of sole trader cover, we'd recommend most that you get a public liability insurance policy in place to protect your business.

Whether you need professional indemnity insurance or not depends on the services your business provides. Many sole traders opt to get this cover to protect themselves against breaches of their contract or in the event that the client sees issue with the work the business has done or the professional advice they received.

Imagine, for example, your business was to offer advice to a client which causes them to make a lose out on a lot of money. The client might then feel they have a right to sue, and that would force your business to fork out on legal costs and, potentially, compensation claims.

Things like this can happen in business, and that's why sole traders rely on professional indemnity insurance cover, to help them navigate the possibilities of loss-causing advice and negligence.

Many entrepreneurs typically start their business journeys as sole traders before eventually transitioning to become owners of limited companies.

Switching from being a sole trader to owning a limited company is a simple process. Just follow the standard procedures for setting up a limited company, and be sure to notify the following parties:

1. HMRC: Inform HMRC to deregister as self-employed and update them about the change in your business structure.
2. Your accountant: Let your accountant know about the shift to a limited company so they can adjust tax calculations accordingly.
3. Your insurance provider: If you're moving from a limited company to being a sole trader, review your insurance policy to ensure it's suitable for your new business setup.

The primary distinction between limited companies and sole traders lies in their ownership structure. Sole trader businesses are owned by a single individual, whereas limited companies can have multiple owners.

In contrast to sole traders, the owners of a limited company usually do not have their personal assets entangled with the business. They are shielded from business liabilities, as the company is regarded as a distinct legal entity separate from its owners. Conversely, sole traders bear full responsibility for the operation, with their personal assets intertwined with the business, making them legally indistinguishable from the company itself.