BUSINESS BASICS

What is a sole trader? A plain guide for the UK.

A sole trader is one person running a business in their own name. It is the simplest way to work for yourself in the UK. This guide explains what it means, what HMRC expects from you, and what it costs in tax, so you can decide if it fits.

Figures for the 2026/27 tax year · Last reviewed 21/10/2026

The short answer

A sole trader is a type of business, not a separate legal person. You are the business. You make every decision, you keep the profit after tax, and you are classed as self-employed.

There is no company to form and nothing to file at Companies House. You tell HMRC you are trading, keep records, and send a Self Assessment tax return each year. That is why many people start this way.

The words "sole trader" and "self-employed" are often used for the same thing. Strictly, self-employed describes how you work and are taxed. Sole trader describes how the business is set up. In everyday use they overlap.

Are you trading at all?

Not every bit of extra income makes you a business. HMRC says you are likely to be trading if you:

Sell things regularly to make a profit, including online or at car boot sales
Make items to sell for a profit
Are paid for a service you provide
Earn commission from selling goods for other people

Other signs are that you choose how, where and when you work, have several customers at once, and provide your own main equipment. Selling off a few personal belongings now and then is usually not trading. If you are unsure, HMRC can advise.

You can also be a sole trader while holding down a job. Plenty of people run a business in the evenings or at weekends alongside employment.

You and the business are the same

This is the point that matters most. Because a sole trader is not a separate legal entity, you have unlimited liability. You are personally responsible for all the debts of the business.

If the business cannot pay a supplier or a loan, the creditor can look to your own money and assets. A limited company is different, because the company is its own legal person. Business insurance can reduce some risks, but it does not change your liability for debts.

For a low-risk business with small costs, this may not worry you. For a business that borrows, signs long contracts or carries stock, it is worth weighing up. Our guide to sole trader vs limited company tax compares the two in more detail.

When you need to register

You can start trading before you register. But you must register for Self Assessment if your trading income is more than £1,000 in a tax year. The tax year runs from 6 April to 5 April.

That £1,000 is the trading allowance. If your gross trading income is £1,000 or less, you usually do not need to tell HMRC. Above it, you need to register. The deadline is 5 October after the end of the tax year in which your income went over £1,000. For the 2025 to 2026 tax year, that was 5 October 2026. Registering late can lead to a penalty.

You can choose to use the £1,000 allowance instead of claiming your actual expenses. You cannot do both. If your real costs are higher than £1,000, claiming expenses usually works out better.

The steps are covered in our guide on how to register as self-employed.

Choosing a business name

You can trade under your own name or pick a separate trading name. There are rules, though. A sole trader's business name must not:

Include "limited", "Ltd", "limited liability partnership", "LLP", "public limited company" or "plc"
Be offensive
Be too similar to another company's trade-marked name

If someone complains that your name is too close to theirs, you may have to change it. If you use a trading name, your own name and the business name must both appear on official paperwork, such as invoices and letters.

What tax a sole trader pays

As a sole trader you pay tax on your profit, not on your takings. Profit is your income minus your allowable business expenses. HMRC works out what you owe from the figures on your tax return.

Income Tax

Your business profit is added to any other income, such as wages from a job. For 2026/27, outside Scotland, the rates are:

Personal Allowance. Up to £12,570 at 0%
Basic rate. £12,571 to £50,270 at 20%
Higher rate. £50,271 to £125,140 at 40%
Additional rate. Over £125,140 at 45%

Bands are different if you live in Scotland.

National Insurance

Sole traders pay Class 4 National Insurance on profits. For 2026/27 it is 6% on profits between £12,570 and £50,270, and 2% on profits above £50,270.

Class 2 works differently now. If your profits are £7,105 or more, Class 2 is treated as paid, so your National Insurance record is protected without a payment. If your profits are below £7,105, you can choose to pay voluntary Class 2 at £3.65 a week to protect your record.

A worked example

This example is made up. Imagine a sole trader in England with no other income. Their sales for 2026/27 are £42,000 and their allowable expenses are £12,000, so their profit is £30,000.

The first £12,570 is covered by the Personal Allowance. That leaves £17,430. Income Tax at 20% on £17,430 is £3,486. Class 4 National Insurance at 6% on the same £17,430 is £1,045.80. The total is £4,531.80, leaving £25,468.20 after tax and National Insurance.

For a fuller breakdown at different profit levels, see how much tax the self-employed pay.

The deadlines that matter

For the 2025 to 2026 tax year, the Self Assessment dates are:

31 October 2026. Deadline for a paper tax return.
31 January 2027. Deadline for an online tax return, and to pay the tax you owe.
31 July. A second payment deadline if you make payments on account towards your bill.

Because tax is paid after the year ends, it helps to set money aside as you go. Many sole traders move a share of each payment they receive into a separate savings account.

VAT and Making Tax Digital

Being a sole trader does not stop you being VAT registered. You must register if your taxable turnover for the last 12 months goes over £90,000. You must also register if you expect it to go over £90,000 in the next 30 days alone. You can register voluntarily below that. See the VAT threshold explained.

Making Tax Digital for Income Tax is also changing how sole traders keep records. It depends on your qualifying income from self-employment and property:

Over £50,000 in 2024/25: you should have started from 6 April 2026
Over £30,000 in 2025/26: you will need to start from 6 April 2027
Over £20,000 in 2026/27: you will need to start from 6 April 2028

Once you are in, you keep digital records in compatible software and send quarterly updates. Our guide on what Making Tax Digital means for the self-employed covers the detail.

Records you need to keep

HMRC expects you to keep records from the day you start, so you can work out your profit or loss. In practice that means:

All sales and other business income
All business costs, with receipts and invoices
Bank statements for the account you use for the business
Any money you put into or take out of the business

Using one bank account just for the business makes the records far easier. Mixing personal and business spending on one card makes the books much slower to sort out at year end.

You also need to choose between cash basis and traditional accounting, and keep records for the right length of time. See how long to keep business records and our self-employed accounting guide.

Pros and cons at a glance

Simple to start. No company to set up and no Companies House filings.
Full control. You make every decision and keep all the profit after tax.
Unlimited liability. Your personal assets are at risk if the business has debts it cannot pay.
Tax on all profit. You are taxed on the whole profit in the year it is made, whether you take it out or not.
Growing paperwork. VAT and Making Tax Digital bring more frequent deadlines as turnover rises.

Many people start as a sole trader and review the choice once profits grow. Our guide on setting up a limited company explains the alternative.