Can a sole trader have employees?

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. 

Can a sole trader legally hire employees?

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.

Can a sole trader be an employee in their own business?

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).

How many employees can a sole trader have? 

A sole trader can hire as many employees as needed as long as they follow the proper procedures, which we will cover next. 

How can I become an employer and set up payroll as a sole trader?

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: 

• They’re paid £123 or more a week 
• They get expenses and company benefits 
• They’re getting a pension 
• They’ve had another job 
• They’ve received Jobseeker’s Allowance, Employment and Support Allowance or Incapacity Benefit 

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. 

1. Register as an employer with HMRC 

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: 

• Sole trader name 
• Unique taxpayer reference 
• National Insurance number 
• Trading name (if applicable) 
• Official business address (this cannot be a PO Box) 
• Official business phone number 
• Nature of business 
• Number of employees expected to be employed in the current tax year 
• Whether any payments have already been made to employees 
• If expenses and benefits are intended to be paid to employees 
• If the sole trader will be acting as a Troncmaster 
• If an Occupational Pension Scheme will be operated 

 2. Set up payroll 

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. 

3. Deduct tax, National Insurance contributions and pensions

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:

• Income Tax: Deducted on earnings above the employee’s tax-free personal allowance of £12,570 per year, with tax rates depending on the employee’s income band.
• Employee National Insurance: Deducted when an employee earns more than £242 per week (£1,048 per month) at a rate of 12% on earnings between £242 and £967 per week and 2% on earnings above £967 per week.
• Employer’s National Insurance: Paid by the employer on earnings above £175 per week (£758 per month) at a rate of 13.8% (rising to 15% from April 2025 onwards).

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.

4. Provide payslips

You must provide employees with a payslip showing:

• Gross pay
• Tax and National Insurance contribution deductions
• Net pay (take-home pay)
• Any additional deductions (such as student loan repayments)

5. Report payroll to HMRC

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.

6. Pay HMRC

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).

7. Keep payroll records

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. 

Employment law for sole traders

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:

Workers

A member of staff will normally be classed as a worker if the following apply:

• The individual has a contract to perform work or services personally in exchange for money or a benefit in kind, and 
• They are not generally allowed to subcontract the work, and 
• They are regularly required to attend a place of work and 
• They are entitled to work for the duration of the contract and 
• They are not contracting with the ‘employer’ as a customer or client (e.g. via a limited company). 

Despite not being classed as employees, workers are legally entitled to certain employment law rights, including:

• National Living Wage or National Minimum Wage
• Protection against unlawful deductions from wages
• Statutory minimum level of paid holiday
• Statutory minimum length of rest breaks
• Protection against unlawful discrimination under The Equality Act 2010 (e.g. race, age, sex discrimination)
• Protection from whistleblowing
• Statutory maternity, paternity, adoption and shared parental pay (in some instances)

Employees

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:

• They are required to work regularly unless they are on leave (e.g. holiday leave)
• They are required to do a minimum number of hours per week/month, and they expect to be paid for any time worked
• A manager or supervisor is responsible for their workload
• They are not allowed to subcontract any of their work
• National Insurance contributions and income taxes are deducted from their wages at source (i.e. through PAYE)
• They are entitled to annual paid holiday leave
• They are entitled to contractual or Statutory Sick Pay
• They are entitled to maternity or paternity pay
• They are entitled to join a pension scheme operated by the business
• Disciplinary and grievance procedures apply to them
• They have to work at a specific location,n such as an office
• Redundancy procedures are set out in their contract
• They are provided with materials, tools and equipment for their work by the business
• They only work for the business – or if they have any other work for another business, it’s a completely different type of work
• Their contract contains terms such as ‘employer’ and ‘employee’

Employees have all the employment rights afforded to workers and are additionally entitled to:

• Statutory Sick Pay
• Statutory maternity, paternity, adoption, and shared parental leave
• Minimum notice periods regarding termination of employment
• Protection against unfair dismissal
• The right to request flexible working
• Time off work to deal with emergencies
• Statutory Redundancy Pay

Please note: Some of these rights require a minimum length of continuous employment before an employee becomes entitled to them.

Self-employed contractors and freelancers

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.

See also: How to sell on Amazon as a sole trader or limited company See also: Do sole traders get a company registration number? See also: Self Assessment – your questions answered 

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 will ,therefore not need to be paid through PAYE:

• They run their own business
• They can decide what type of work they do – and when, where, and how to perform the work
• They are entitled to subcontract out their work
• They are responsible for rectifying any work which is deemed unsatisfactory without being paid for the extra time required
• They work on a fixed price basis, as opposed to being paid by the hour
• They are entitled to work for other clients
• They provide their own materials, tools and equipment necessary to perform the work

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:

• They provide quotes and/or take part in bids to obtain work
• They are not under any direct supervision
• They submit regular invoices in respect of completed work
• They are responsible for completing their annual Self Assessment tax returns
• They are not entitled to any holiday or sick pay
• They operate under a contract which includes terms such as ‘self-employed’, ‘consultant’, or ‘independent contractor’

Are there advantages to employing people as a limited company compared to a sole trader? 

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.

See also: Limited company advantages and disadvantages

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.

Summing up hiring employees as a sole trader  

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.