If you’re starting out in business, one of the first decisions you’ll face is how to structure it — and for most people going it alone, the simplest option is to become a sole trader. It’s the most common business structure in the UK, and for good reason: it’s quick to set up, easy to run, and keeps you firmly in control.
But being a sole trader also comes with responsibilities and a few important things you need to get right, especially around tax. This guide explains exactly what a sole trader is, the pros and cons, how to register, your tax obligations, and a significant change on the horizon that every sole trader should be ready for.
What is a sole trader?
A sole trader is a self-employed individual who owns and runs their business as themselves. In the eyes of the law, you and your business are one and the same — there’s no separate legal entity, so you own all the profits (after tax) and are personally responsible for the business and its debts.
It’s the structure used by a huge range of people, from electricians, hairdressers and consultants to freelancers and online sellers. You can trade under your own name or a business name, and you can employ staff if you wish — being a “sole” trader refers to the ownership, not the size.
The advantages of being a sole trader
Being a sole trader offers several genuine benefits:
- Simple and cheap to set up. There’s minimal paperwork and no registration fee — you can be up and running quickly.
- Full control. You make all the decisions and run the business exactly as you see fit.
- You keep the profits. After tax, all the profit is yours.
- Privacy. Unlike a limited company, your accounts aren’t published publicly.
- Easy to change later. If your business grows, you can switch to a limited company down the line.
The disadvantages to be aware of
There are trade-offs too, and it’s important to understand them:
- Unlimited liability. This is the big one. Because there’s no legal separation between you and the business, you’re personally liable for its debts — which could put your personal assets at risk.
- Tax on all profits. As profits grow, a sole trader can end up paying more tax than they might through a limited company.
- It can be harder to raise finance. Some lenders and investors prefer dealing with limited companies.
- The responsibility is all yours. There’s no one to share the risk or the workload of running things.
How to register as a sole trader
Getting started is refreshingly straightforward. You register with HMRC for Self Assessment, and you must do this by 5 October following the end of the tax year in which you started trading to avoid a penalty. Once registered, you’ll receive a Unique Taxpayer Reference (UTR) and file a tax return each year.
One useful point for those just testing the water: there’s a £1,000 trading allowance, so if your income from self-employment is under £1,000 in a tax year, you generally don’t need to register or report it. Above that, registration is required. From the outset, it’s wise to keep clear records and separate your business and personal banking.
Sole trader tax and National Insurance
As a sole trader, you pay tax on your profits (income minus allowable expenses), not your total turnover. For the 2025/26 tax year, that means:
- Income Tax on profits above the £12,570 Personal Allowance — 20% up to £50,270, 40% up to £125,140, and 45% above (rates differ in Scotland).
- Class 4 National Insurance at 6% on profits between £12,570 and £50,270, then 2% above.
- Class 2 National Insurance is no longer a mandatory charge — if your profits are above the small profits threshold you automatically receive a qualifying year towards your State Pension without paying.
You’ll also need to register for VAT once your turnover exceeds £90,000 in any rolling 12-month period. It’s all reported and paid through your annual Self Assessment return, with the online filing and payment deadline falling on 31 January.
Making Tax Digital: an important change ahead
One development every sole trader should prepare for is Making Tax Digital for Income Tax. From 6 April 2026, sole traders and landlords with qualifying income over £50,000 must keep digital records and send HMRC quarterly updates using compatible software, replacing the traditional once-a-year return. The threshold then lowers to £30,000 from April 2027 and £20,000 from April 2028. If this is likely to apply to you, it’s worth getting set up with suitable software and good record-keeping habits well in advance.
Sole trader or limited company?
Being a sole trader is the ideal starting point for most new businesses, but it isn’t always the best long-term structure. As profits grow — often once they reach around £30,000 to £40,000 — a limited company can become more tax-efficient and offers the protection of limited liability. It’s a decision worth reviewing with an accountant as your business develops.
Getting it right from the start
Setting up as a sole trader is simple, but staying on top of your tax, deadlines and record-keeping is what keeps it stress-free — and getting good advice early can save you money and worry later.
At MW Accountancy, we’re chartered accountants in Milton Keynes who help sole traders and small businesses with everything from registration and Self Assessment to tax planning and getting ready for Making Tax Digital. Get in touch for friendly, expert advice tailored to your business.
This article is general information, not personal tax advice. Tax rules and rates change, so please confirm the current position with HMRC or a qualified accountant before acting.
Frequently asked questions
Do I need to register as a sole trader?
Yes, if your income from self-employment is over £1,000 in a tax year, you must register with HMRC for Self Assessment — by 5 October following the end of the tax year you started trading. Below £1,000, the trading allowance means you generally don’t need to register.
How much tax does a sole trader pay?
You pay Income Tax on profits above the £12,570 Personal Allowance (20%, 40% or 45%), plus Class 4 National Insurance at 6% on profits between £12,570 and £50,270 and 2% above. The exact amount depends on your total profit.
Is it better to be a sole trader or a limited company?
A sole trader is simpler and ideal for getting started. As profits grow, a limited company can be more tax-efficient and offers limited liability. The right choice depends on your profits and circumstances, so it’s worth taking professional advice.
