If you’re wondering whether a sole trader can have employees, the answer is yes. While many sole traders always work alone, it’s not unusual for them to have one or more employees. There’s a common misconception that being a ‘sole trader’ means that you must work alone. A sole trader is a legal name for a particular business structure. It comes with various legal, tax and payroll considerations when bringing employees into the business, which we will cover in this post. We will also discuss related matters such as employment law, contractors, freelancers, and limited companies.
Yes, sole traders often hire others to work for them, either as employees, independent freelancers, or contractors.
You do not have to register a limited company to employ others to work for you—though there are benefits, which we will cover at the end. The term ‘sole trader’ applies to self-employed people instead of someone who operates through a separate legal structure like a limited company.
A big difference between sole traders and company directors is that a director can be an employee of their own business. Sole traders are always self-employed . Whilst they can employ other people, they cannot employ themselves.
The individual sole trader is the business, so they cannot have an employment contract with themselves. Conversely, a company is classified as a separate legal entity (person) in its own right. It is separate from its owners and directors, which means that a company can have a contract of employment with its own director(s).
A sole trader can hire as many employees as needed as long as they follow the proper procedures, which we will cover next.
You need to register as an employer with HM Revenue and Customs (HMRC) and operate Pay As You Earn (PAYE) as part of your payroll if any of the following applies to an employee in the current tax year:
If you do not need to register, you must keep payroll records. The basic steps of registering as an employer are the same for sole traders and limited companies.
The first step is to register for PAYE with HMRC. You should do this before you pay your employees’ first salary, but not more than 2 months before this first payment. Getting your employer’s PAYE reference number can take up to 20 working days .
Sole traders can register for PAYE by filling out this online form . The following information will need to be gathered to fill out the form:
Once registered, you need to calculate the correct wages and pay your employees for their work. This is called payroll. To do this, you can either use HMRC’s free Basic PAYE Tools (for businesses with fewer than 10 employees), invest in payroll software like Xero or QuickBooks, or hire an accountant or payroll provider to manage payroll for you.
When paying wages and salaries, you must deduct Income Tax and employee National Insurance contributions and pay employer’s National Insurance contributions based on specific earning thresholds:
You should also enrol employees in a workplace pension scheme and make contributions if they meet the criteria for automatic enrolment. This applies to employees aged 22 or over who earn at least £10,000 per year.
You must provide employees with a payslip showing:
Every time you pay employees, you must submit a Full Payment Submission (FPS) to HMRC through your payroll software. This report includes employees’ pay and tax details.
Each month or quarter (depending on payroll size), you must send tax and National Insurance contribution payments to HMRC by the 22nd of the following month (or the 19th if paying by post).
HMRC requires you to keep payroll records for at least 3 years, including employee payments, any tax and National Insurance contribution deductions, and employee leave and sickness records.
A sole trader must establish if anyone working for them is an employee, a worker, or a self-employed contractor/freelancer.
Determining this is critical for understanding the extent of one’s employment law obligations. We will consider these different types of work status below:
A member of staff will normally be classed as a worker if the following apply:
Despite not being classed as employees, workers are legally entitled to certain employment law rights, including:
Employees work under an employment contract. However, they can also be classed as employees in the absence of a contract of employment if most of the following attributes apply:
Employees have all the employment rights afforded to workers and are additionally entitled to:
Please note: Some of these rights require a minimum length of continuous employment before an employee becomes entitled to them.
If a person is neither an employee nor a worker, they are likely to be considered a self-employed contractor or freelancer. This status includes sole traders.
If a sole trader contracts with another self-employed individual (who is not a worker or employee), then there will be no employment law obligations involved other than for health and safety and certain protections from discrimination.
It is important to note that HMRC can sometimes regard someone as self-employed for tax purposes, even if they have a different status in employment law.
If most of the following are true, then they will generally not be considered employees for tax purposes and won’t need to be paid through PAYE:
Separately to the above conditions which relate to PAYE, someone will probably be considered to be self-employed for the purposes of employment law if most of the following apply:
As we can see above, taking on employees, or even workers, can be a risky proposition.
Although employers’ liability insurance covers certain expenses related to potential legal claims made by employees, defending an employment law case will typically set back an employer several thousand pounds at least.
For a sole trader with limited funds, exposure to a serious employment law claim can often result in personal bankruptcy, as they are personally liable for any debts, including compensation which may need to be paid to an employee.
So it’s worth considering protecting one’s personal finances when becoming an employer by registering as a limited company, which limits shareholders’ exposure. The process can take less than 24 hours when using a specialist company formation agent such as Rapid Formations .
Hiring employees as a sole trader is entirely possible. Still, it comes with significant legal and financial responsibilities, such as formally registering as an employer with HMRC and being compliant with employment law. You can choose to hire employees, work with freelancers, or even register as a limited company for added legal protection. For support transitioning from a sole trader to a limited company, check out Rapid Formations’ company registration packages . We provide tailored services to get your new company up and running in as little as 24 hours. If you’re unsure which services you need, contact us and one of our friendly company experts will be happy to help. If you found this guide helpful, explore more Rapid Formations blog for more articles on running and growing your business. Please comment below if you have any further questions about employing staff as a sole trader.