Sole trader debt

A sole trader is a self-employed person who runs their business as themselves, not as a separate legal entity, like a limited company.

This is the simplest business structure in the UK and is popular with people such as: 

• freelancers
• contractors
• tradespeople
• small business owners

If you’re a sole trader, you can keep all your business’s profits after tax and business expenses, and you’ll be responsible for paying income tax and national insurance on your earnings.

You’ll also need to submit a Self Assessment tax return to HMRC each year to declare your income and work out how much tax you owe.

Unlimited liability means there’s no distinction between your business’s money and your personal money when it comes to debts.

So unlike limited companies, where debts stay with the business, sole traders are personally responsible for all business debts, such as: 

• business loans and overdrafts
• unpaid invoices from suppliers
• unpaid rent or utility bills for business premises
• HMRC debts, such as income tax, VAT and national insurance
• legal judgments, such as compensation claims

This means that your personal assets, such as your home, your car or your personal savings, could be at risk.

If you fall behind on payments - whether that’s to suppliers, lenders, landlords, or HMRC for taxes - creditors are entitled to pursue you directly for the money owed.

Speak with your creditors directly to see if you can informally negotiate an affordable repayment plan.

If that doesn’t work, speak to a debt adviser as soon as you can, as ignoring debts doesn’t make them go away.

In fact, it usually makes things worse, with possible consequences of unpaid debts including:

• county court judgments (CCJs)
• enforcement action
• charging orders

Yes.

Stopping trading doesn’t erase debts you built up while you were self-employed.

Creditors can still pursue you for unpaid debts even after you’ve closed your business.

There’s no automatic way to write off debts as a sole trader.

But if you’re struggling with debt, there are a range of debt solutions that might be available depending on your situation, such as:

• a debt management plan
• an individual voluntary arrangement
• bankruptcy
• a debt relief order

Some options can help you make more manageable payments, while others may lead to some or all of your debt being written off.

A debt adviser can explain these options in more detail and help you understand which ones may be right for your circumstances.

While you can’t remove your liability as a sole trader, you can take steps to reduce your risk, such as:

• keeping clear financial records and tracking cash flow
• separate your personal and business bank accounts for clarity
• insure your business
• be cautious about taking on debt
• regularly review your financial position
• plan ahead for tax bills

As a sole trader, your work and income can be irregular, so it’s also important to budget carefully.

Our free budget planner should help with this.

Also check out our guide to managing your money when you’re self-employed.