Britain’s army of sole traders is dwindling

Britain’s army of successful sole traders is dwindling, dropping 4 per cent last year and by 11 per cent since 2019, official statistics show.
People working in partnerships, typically self-employed farmers, builders and those providing professional services, have disappeared at an even faster rate, down 18 per cent since 2019.
Meanwhile, the number of business people choosing to operate through companies have continued to rise, despite higher rates of corporation tax. The number of companies increased one per cent in the last year, and by four per cent since 2019, to two million. They now represent 75.6 per cent of all UK businesses trading over the VAT threshold.
The figures from HM Revenues & Customs were collated in March and include all businesses generating revenues of at least £85,000 a year, and so required to register for VAT, or that employed people and paid them through the PAYE system.
The Office for National Statistics said there were 396,740 sole traders operating at this level in March, 167,465 partnerships and 2,059,120 companies. Only London, the east of England, Scotland and Northern Ireland registered an overall increase in businesses year-on-year.
The statisticians noted: “Overall, the growth in the business population has slowed since 2018, compared with the 2012 to 2018 time period.”
Tina McKenzie, policy chair at the Federation of Small Businesses, called on the government to use its first budget in October to address the decline.
“The UK has a proud history of entrepreneurship, and we can’t afford to let that legacy slip away. There must be a pro-small business budget,” she said.
The ONS said that the total number of businesses over the VAT registration threshold or paying PAYE in March was 2.72 million, down by 0.1 per cent in the same month the year before. The total is lower than the estimate for the total business population of 5.6 million, calculated by the Department for Business & Trade, as this figure includes estimates of unregistered businesses making revenues of less than £85,000 a year.
The ONS said that of the two million companies, 44 per cent were single-employee limited firms. The most prevalent activity for these one-person-bands was the provision of professional, scientific, and technical services.
Accountants suggested the fall in the self-employed could be, in part, due to improvements to flexible working available to employees — the ability to manage your time around work commitments was previously one driver of self employment.
A study by the ONS in 2022 appeared to support this theory. It noted that after two decades of growth in the self-employed, their number fell from five million at the end of 2019 to 4.2 million in early 2022, “largely driven by people flowing out of self-employment to become employees”.
It is unclear why partnerships have declined, although there has been significant consolidation in some sectors, from vets practices to accountancy and solicitors firms.
The continued growth in numbers of companies came as a surprise to some observers. Since April 1, 2023, profits over £250,000 a year attract the new 25 per cent rate of corporation tax, up from 19 per cent before. Those companies making more than £50,000 but less than £250,000 a year pay on a range between 19 and 25 per cent.
The taxation of dividends paid to the shareholders of companies has also become more onerous in recent years, with rates increasing and annual tax-free allowances decreasing.
However, Jaan Larner, a corporate and commercial partner at Keystone Law, a firm of solicitors, said people were now comfortable with sharing ownership of businesses through shares, which can be more easily transferred. Companies also provide their directors with limited liability to any debts, rather than the unlimited liability facing sole traders and partnerships.
He added that the growing legal duties on directors and “reduction in relative tax efficiency” of a corporate structure had yet to make their mark. “While well intentioned, diligent and law-abiding, I suspect most company directors are unaware of the full extent of the duties placed upon them,” he said, adding that these duties were now “essentially seen as the price of doing business”.
The FSB said the chancellor had to support small businesses in her first budget. It wants to see the annual £5,000 tax relief on employer national insurance bills uprated at the same pace as the national minimum wage so that the benefit is not eroded.
There should also be better regulation of personal guarantees sought by finance providers, and the retention of the 10 per cent rate of capital gains on the first £1 million of gains that business owners see when they sell up, the FSB said. “If we want small firms to thrive, we must ensure the right environment for them to grow,” said McKenzie.