The Most Common Business in the UK
More than half of all businesses in the UK are run by sole traders. The government's own business population estimates put the figure at 3.2 million sole proprietorships at the start of 2025, 57% of every private sector business in the country. Plumbers, hairdressers, tutors, photographers, dog walkers, consultants, market traders, freelance designers. If you work for yourself and have never set up a company, there is a good chance you are one of them, whether or not you have ever used the phrase.
Despite that, the term is widely misunderstood. People ask how to "register as a sole trader" when there is no such register. They assume the thresholds that matter are based on profit when the important ones are based on turnover. And they are often surprised by the size of their first tax bill. This guide explains what a sole trader actually is, how the tax works for 2026/27, and the practical points we see trip people up.
What Is a Sole Trader?
A sole trader is an individual who owns and runs a business in their own name, with no separate legal entity between them and the business. You are the business. The profits are yours, the contracts are yours, the debts are yours, and the tax on the profits is charged on you personally through Self Assessment.
That is the whole of the sole trader meaning in one sentence: the business and the owner are the same legal person. Everything else follows from it.
- Tax. There is no business tax return. Your trading profit goes on your personal tax return alongside any salary, rental income or savings interest, and you pay Income Tax and Class 4 National Insurance on it.
- Money. There is no salary. Whatever the business earns, after expenses, is your income. Taking money out for yourself is just drawings, which are not an expense and do not reduce your tax.
- Liability. If the business owes money it cannot pay, you owe it personally. This is what "unlimited liability" means.
- Paperwork. Nothing is filed at Companies House. Your accounts are not published. Nobody can look up your profits.
"Sole" refers to ownership, not headcount. A sole trader can employ staff, use subcontractors and run several shops. What makes you a sole trader is that you own the business alone and have not incorporated it.
Sole Trader vs Self Employed
These two terms get used as if they mean the same thing, and for most people they effectively do. But they are not identical.
"Self employed" is a tax and employment status. It describes anyone who works for themselves rather than for an employer. "Sole trader" is a business structure. It describes one particular way of being self employed.
| Self employed? | Sole trader? | |
|---|---|---|
| Freelance designer working alone, no company | Yes | Yes |
| Partner in a two person bookkeeping firm | Yes | No, a partner |
| Director of their own limited company | No, an office holder and usually an employee | No |
| Construction subcontractor under CIS, no company | Yes | Yes |
| Contractor working through an umbrella company | No, an employee of the umbrella | No |
So every sole trader is self employed, but not every self employed person is a sole trader. Partners in a partnership are self employed too, but they file a share of a partnership tax return rather than trading alone. When HMRC's online forms ask you to register "as self employed", that is the same step a new sole trader takes.
How to Become a Sole Trader
Here is the point most guides skip: you become a sole trader by trading, not by registering. The moment you start selling goods or services on your own account with a view to profit, you are a sole trader. GOV.UK says it plainly: you can start trading straight away without registering.
What you register for is tax. If your income from self employment is more than £1,000 in a tax year, you must tell HMRC by registering for Self Assessment. The deadline is 5 October after the end of the tax year in which you started. Start trading in November 2026, which is in the 2026/27 tax year, and you have until 5 October 2027 to register.
The practical steps look like this:
- Register for Self Assessment online with HMRC as self employed. You will need a Government Gateway account.
- Wait for your UTR. HMRC posts you a ten digit Unique Taxpayer Reference, which can take a couple of weeks. You cannot file without it.
- Keep records from day one. Every sale, every expense, every receipt. A simple spreadsheet works at the start, but software is better, and it will soon be required for many people (see Making Tax Digital below).
- File your first return by 31 January after the end of the tax year, and pay what you owe on the same date.
That £1,000 figure is the trading allowance. It is measured on gross income, not profit. If you sell £1,800 of crafts a year and spend £1,200 on materials, your profit is only £600, but your income is over £1,000 so you still need to register. In that case you would normally claim actual expenses rather than the allowance.
Registering late can mean a "failure to notify" penalty, worked out as a percentage of the tax that was unpaid because HMRC did not know about you. If there is no tax due, there is no penalty, but you should not rely on your own estimate of that before your first year's figures are done.
How a Sole Trader Pays Tax
Sole traders pay two things on their profits: Income Tax and Class 4 National Insurance. Both are calculated on your return and paid together. The figures below are for England, Wales and Northern Ireland in 2026/27. Scotland sets its own Income Tax bands, but National Insurance is the same across the UK.
| Rate | Band of taxable profit | |
|---|---|---|
| Personal Allowance | 0% | First £12,570 |
| Basic rate Income Tax | 20% | £12,571 to £50,270 |
| Higher rate Income Tax | 40% | £50,271 to £125,140 |
| Additional rate Income Tax | 45% | Above £125,140 |
| Class 4 National Insurance | 6% | £12,570 to £50,270 |
| Class 4 National Insurance | 2% | Above £50,270 |
The Personal Allowance starts to shrink once your total income goes over £100,000, losing £1 for every £2 above that line, so it is gone entirely at £125,140.
Class 2 National Insurance no longer costs anything for most sole traders. If your profits are above the Small Profits Threshold of £7,105, Class 2 is treated as paid and you get the State Pension credit for free. If your profits are below it, you can pay voluntary Class 2 at £3.65 a week to protect your record, which is one of the cheapest ways to buy a qualifying year.
Profit means income minus allowable expenses. Since April 2024 the cash basis is the default for sole traders, so for most people that means money received minus money spent on the business during the tax year, with a few adjustments for things like equipment.
A Worked Example: Marcus's First Year
Marcus leaves his job in May 2026 to work as a self employed garden designer in Barnet. In his first tax year, 6 April 2026 to 5 April 2027, he invoices £52,000 and spends £14,000 on plants, tools, van costs and insurance. He has no other income.
| Amount | |
|---|---|
| Turnover | £52,000 |
| Allowable expenses | £14,000 |
| Taxable profit | £38,000 |
| Less Personal Allowance | £12,570 |
| Profit in the basic rate band | £25,430 |
| Income Tax at 20% | £5,086.00 |
| Class 4 NI at 6% | £1,525.80 |
| Class 2 NI | Nil, treated as paid |
| Total tax and NI for 2026/27 | £6,611.80 |
That is 17.4% of his profit. An employee on a £38,000 salary would pay the same Income Tax but 8% employee National Insurance rather than 6%, so Marcus pays about £509 less in National Insurance than he would on a payslip.
Now look at when he pays it. Marcus files his 2026/27 return by 31 January 2028. Because his bill is over £1,000 and none of it was taken at source, HMRC also asks for the first payment on account towards 2027/28, which is half of this year's bill.
| Date | What is due | Amount |
|---|---|---|
| 31 January 2028 | Balancing payment for 2026/27 | £6,611.80 |
| 31 January 2028 | First payment on account for 2027/28 | £3,305.90 |
| Total due on one day | £9,917.70 | |
| 31 July 2028 | Second payment on account for 2027/28 | £3,305.90 |
That is 150% of a year's tax on a single day. It is the single biggest shock for new sole traders, and it lands eight months after their first anniversary in business, by which time the money has often been spent. Our advice to every new sole trader is to move 25% of each payment received into a separate savings account from the first invoice. For Marcus that would be £13,000 by April 2027, comfortably more than he needs in January.
You can apply to reduce payments on account if you expect your profit to fall, but do not do it just to ease cash flow. If the profit does not fall, HMRC charges interest on the shortfall.
The Thresholds That Catch Sole Traders Out
A pattern we notice again and again: sole traders watch their profit, but most of the thresholds that change their obligations are measured on turnover. Marcus only has £38,000 of profit, yet he is already past one of the big compliance lines.
| Threshold | Measured on | Figure | What happens |
|---|---|---|---|
| Register for Self Assessment | Gross income | £1,000 | You must tell HMRC |
| Making Tax Digital for Income Tax | Gross income (turnover) | £50,000 now, £30,000 from April 2027, £20,000 from April 2028 | Digital records and quarterly updates |
| VAT registration | Taxable turnover, rolling 12 months | £90,000 | You must register and charge VAT |
| Class 2 Small Profits Threshold | Profit | £7,105 | Class 2 treated as paid above this |
| Income Tax and Class 4 start | Profit | £12,570 | Tax starts |
| Payments on account | Tax bill | £1,000 | Advance payments start |
Making Tax Digital is the one to watch right now. Its threshold is based on "qualifying income", which for a sole trader means turnover before expenses. Marcus, with a £52,000 turnover, is over the current £50,000 line even though he would describe himself as a modest earner. When the threshold drops to £30,000 in April 2027, a large number of sole traders with profits in the teens will be brought in. Whether you are caught is decided by the figures on earlier returns, so the return you file for 2025/26 by 31 January 2027 is the one HMRC will look at for the April 2027 group.
VAT works on a rolling 12 month look back, not the tax year. You need to check it at the end of every month, and register within 30 days of the end of the month you went over £90,000.
Can a Sole Trader Employ Staff?
Yes. Being a sole trader is about who owns the business, not how many people work in it. Plenty of sole traders employ several people.
If you take someone on, you become an employer and have to:
- Register as an employer with HMRC and run PAYE, deducting tax and National Insurance from their pay and reporting it in real time.
- Pay employer National Insurance at 15% above the secondary threshold, though the Employment Allowance can wipe out up to £10,500 of it.
- Get employers' liability insurance, which is a legal requirement with a minimum cover of £5 million. Fines apply for every day you are not covered.
- Enrol eligible staff into a workplace pension under auto enrolment.
Wages are an allowable business expense. Your own drawings are not. A sole trader cannot put themselves on the payroll, because you cannot employ yourself.
Can a Sole Trader Have a Business Name?
Yes. You can trade under your own name or a trading name, such as "Barnet Garden Design" rather than "Marcus Lewis". There is no need to register a trading name with anyone, but there are rules:
- You cannot use "Limited", "Ltd", "LLP" or "plc", because those words say you are something you are not.
- You cannot use a name that is offensive, or certain sensitive words such as "Royal", "Bank" or "Chartered" without permission.
- You cannot copy someone else's registered trade mark, and a name too close to an established business can lead to a passing off claim.
- If you trade under a name that is not your own, your invoices, letters and website must show your own name and a business address.
Checking the Companies House register and the trade mark register before you print anything is a ten minute job that can save a rebrand later.
Unlimited Liability: How Worried Should You Be?
Unlimited liability is the most quoted disadvantage of being a sole trader, and it is real. If a customer sues and wins, or the business runs up debts it cannot pay, creditors can come after your savings, your car and potentially your home.
Our honest view is that it matters a lot for some businesses and very little for others. For a tutor, bookkeeper or copywriter with no stock, no premises lease and no staff, the realistic risks are a client dispute or an accident, both of which are better handled by professional indemnity and public liability insurance than by forming a company. A limited company does not protect you from your own negligence anyway, and banks and landlords commonly ask small company directors for personal guarantees, which put you straight back on the hook.
Where liability does change the picture is when you sign long contracts, hold significant stock, take on premises, borrow, or work in an area where one mistake can be very expensive. Those are good reasons to look at incorporating, and they are covered in our sole trader vs limited company guide.
Sole Trader Advantages and Disadvantages
| Advantages | Disadvantages |
|---|---|
| Free and instant to start, no Companies House filing | Unlimited personal liability for business debts |
| Your accounts stay private | Higher earners can pay more tax than through a company |
| Simple records, cash basis by default | Some larger clients prefer or require a limited company |
| Lower NI rate than employees (6% vs 8%) | Harder to bring in investors or sell part of the business |
| You keep all the profit and take money out freely | First year tax bill can be 150% of the annual liability |
| Losses can often be set against other income, including a salary from a previous job | Making Tax Digital now applies from £50,000 turnover and falling |
The point about losses is underrated. If your first year makes a loss, a sole trader can usually offset it against other income in the same or previous tax year and get Income Tax back, for example on the salary you earned before you left your job. Relief against other income is capped at the greater of £50,000 or 25% of your income, and the business must be run on a commercial basis. A loss inside a limited company stays inside the company.
Our View
We think being a sole trader is the right starting point for most new businesses, and the right long term structure for many more than the internet would suggest. Online, the conversation is dominated by the tax saving from incorporating. That saving has shrunk a lot since 2022, because dividend tax rates went up, the dividend allowance was cut to £500 and Corporation Tax rose to as much as 25%. For a profit of £30,000 to £40,000, the difference is often a few hundred pounds a year, which an accountant's bill for company accounts and the time spent on director paperwork can easily swallow.
What actually costs sole traders money, in our experience, is not their structure. It is not setting tax aside, not claiming expenses they are entitled to, such as mileage and use of home, and not noticing they have crossed a turnover threshold until HMRC tells them. Get those three right and being a sole trader is a very efficient way to work.
If your profits are heading comfortably above £50,000, you need investors, or you carry real commercial risk, that is the time to sit down and run the numbers on a company.
Common Mistakes
- Waiting to "register as a sole trader" before trading. You are already one. What matters is registering for Self Assessment by 5 October after the tax year you started.
- Mixing business and personal money. There is no legal requirement for a separate bank account, but many banks do not allow business use of a personal account, and mixing the two makes your records far harder to keep and defend.
- Thinking drawings are wages. Money you take out is not an expense. Tax is on profit, regardless of what you withdraw.
- Tracking profit and ignoring turnover. MTD and VAT are both triggered by turnover.
- Spending the first year's cash. Remember the 150% January.
- Assuming "self employed" means outside IR35 or employment law. If you work like an employee for one client, HMRC may see it differently. Our IR35 guide explains how employment status is judged.
How IAK Can Help
We act for sole traders of every size, from people in their first month of trading to established tradespeople with staff. We can register you with HMRC, set up simple bookkeeping or software that is ready for Making Tax Digital, prepare and file your Self Assessment through our personal tax service, run payroll if you take on staff, and tell you honestly when, or whether, incorporating would be worth it. You can read more about how we work with sole traders, or see our broader guide to what an accountant does.
Call us on 020 8445 3300 or get in touch for a free initial conversation.
Sources
- Set up as a sole trader, GOV.UK, on starting to trade before registering and the £1,000 registration trigger.
- Register for Self Assessment, GOV.UK, on the 5 October registration deadline.
- Business population estimates for the UK and regions 2025, Department for Business and Trade, for the 3.2 million sole proprietorships and 57% share.
- Self-employed National Insurance rates, GOV.UK, on Class 4 rates and the Class 2 Small Profits Threshold.
- Tax-free allowances on property and trading income, GOV.UK, on the £1,000 trading allowance.
- Making Tax Digital for Income Tax, GOV.UK, on qualifying income and the £50,000, £30,000 and £20,000 thresholds.
- Employers' liability insurance, GOV.UK, on the £5 million minimum cover.
- Business names: sole traders, GOV.UK, on naming rules for sole traders.