Decline of Sole Traders in Britain: A Closer Look

The number of sole traders in Britain has seen a significant decline, decreasing by 4% last year and 11% since 2019, according to official statistics.

Partnerships, such as those found in the self-employed sectors like farming, construction, and professional services, experienced an even sharper drop, with an 18% decline observed since 2019.

Contrastingly, the trend for businesses operating as companies has been upward, with a 1% increase in the last year and a 4% rise since 2019, totaling two million companies. These firms now account for 75.6% of all UK businesses registered for VAT.

Statistics from HM Revenues & Customs, compiled in March, reveal that businesses generating revenues of at least £85,000 annually, which are obligated to register for VAT or operate under PAYE, include 396,740 sole traders, 167,465 partnerships, and 2,059,120 companies. Notably, only regions such as London, the East of England, Scotland, and Northern Ireland reported year-on-year business growth.

According to the Office for National Statistics (ONS), the growth of the business population has decelerated since 2018, as compared to the period from 2012 to 2018.

Tina McKenzie, policy chair at the Federation of Small Businesses, emphasized the need for government intervention in the upcoming budget to address this downturn, stating, “The UK has a proud history of entrepreneurship, and it is vital that this legacy is preserved with pro-small business initiatives.”

The ONS has reported a total of 2.72 million businesses meeting the VAT registration criteria or those paying PAYE, a slight decrease of 0.1% compared to the previous year. This figure is lower than the estimated total business population of 5.6 million, as it does not include unregistered businesses earning less than £85,000.

Of the two million registered companies, 44% operate as single-employee limited firms, predominantly in sectors such as professional, scientific, and technical services.

Experts believe the decrease in self-employed individuals may be partly attributed to improved flexible working options for employees, which previously made self-employment attractive.

An ONS study from 2022 highlighted that the number of self-employed individuals fell from five million at the end of 2019 to 4.2 million in early 2022, primarily due to individuals transitioning from self-employment to salaried positions.

The reasons behind the decline in partnerships remain less clear, though significant consolidation in various sectors, including veterinary practices and law firms, may play a role.

The continued growth in company numbers has surprised some analysts, especially in light of a new 25% corporation tax rate for profits exceeding £250,000, which increased from the previous 19%. Companies earning between £50,000 and £250,000 pay taxes between these rates.

Changes to dividend taxation have also made it more burdensome for shareholders, with rising rates and diminishing annual tax-free allowances.

However, Jaan Larner, a partner at Keystone Law, noted that there is a growing acceptance of shared ownership through shares, which allow easier transferability. Additionally, forming companies provides limited liability for directors, unlike sole traders and partnerships who face unlimited liability.

Larner added that while the legal responsibilities for directors and the reduced tax efficiency of corporate structures may impact some, many directors may not fully understand their obligations, which are often viewed as just part of doing business.

The Federation of Small Businesses underscored the necessity for the chancellor to support small enterprises in her inaugural budget. The organization advocates for annual adjustments to the £5,000 tax relief on employer national insurance in line with increases to the national minimum wage to maintain its value.

Furthermore, the FSB called for better regulation regarding personal guarantees from finance providers and the continuation of the 10% capital gains tax rate on the initial £1 million in gains realized upon business sales. McKenzie stated, “To ensure small firms flourish, we must create an environment conducive to their growth.”