Everything you need to know to become sole trader in the UK

Thinking about going self-employed? To become a sole trader and be your own boss is quite the adventure—in a good way, of course (well, mostly).

Free from the shackles of full-time employment, you’ll enjoy complete control over your finances, career path and general working day. 

But before you take the leap and go self-employed, there are some things you should know. In this piece, we explore the basics of what to expect when you become sole traders. Here’s everything you need to know (for now).

What is a sole trader?

A sole trader is ultimately a self-employed individual who owns all of their own business. Once they’ve filed their annual returns and paid any due tax, all profits are ultimately theirs to keep. At the same time, they’re personally responsible for any business losses since they’re not a separate legal entity.

Businesses that are set up as sole traders make up nearly two-thirds of all businesses.

Advantages of being a sole trader

If you’re a sole trader, you’re your own boss. You decide the direction of your own business. And whilst you probably won’t earn if you take a vacation, you’re crucially in charge of your vacation. And your working day routine.

All profits are also yours to keep. Not to mention, it’s free to register as a sole trader and you’ll enjoy maximum privacy when it comes to earnings unlike with a limited company. That said, you can move over to a limited company structure if and when you fancy it. After all, you’re in charge remember.

Disadvantages of being a sole trader

Like all things, being a sole trader does come with its disadvantages. Since sole traders are not recognised as separate legal entities from their business, any liabilities and debts are yours. If you fail to pay your debts, you’ll have to pay any owed money out of your own assets.

Sole traders also don’t have the same prestige as limited companies and some businesses may refuse to work with sole traders altogether. Being a sole trader also means tax planning limitations (sole traders typically pay more in tax than their counterpart in a limited company) and difficulties in raising capital to expand your business.

How to register as a sole trader in the UK

Becoming a sole trader is reasonably simple and straightforward. The first thing you need to do is register for self-assessment. This is the system that HMRC uses to collect details on your earnings and more importantly (for them), your income tax. If this is your first time using the system, you’ll receive a 10-digit Unique Taxpayer Reference. This will be used on all email and post correspondence, as well as in your online HMRC portal as you file your returns, pay your tax bills and check your balance.

If you’ve already registered for a UTR (but can’t find it), you can find your UTR here. Alternatively, you can register as a sole trader by printing off the form and sending it to the listed address on the form. Another option is to call HMRC on 0300 200 3310.

Setting up as a sole trader is completely free. You’ll need to provide:

• Your name
• Date of birth
• Postal address
• Contact details (mobile and email)
• National Insurance (NI) number
• Name of business
• What type of work you do
• Start date

Make sure you register by 5th October on your second business year in time for the following January to file your return. Whilst we know this deadline may seem like a long way off and ultimately, a bonus, it’s better to get on top of things sooner rather than later. After all, you want to get your business off on the right foot. 

Tax obligations for UK sole traders

How much tax you’ll pay as a sole trader depends on your income and profits. Each sole trader is given a tax-free personal allowance threshold, which for the 2025/2026 tax year is £12,570. Once this has been exceeded, you’ll pay income tax on all profits above this amount.

For any profits between £12,501 and £50,270, a basic rate of 20% tax is applied. Earnings between £50,271 and £125,140 are then taxed at 40%. All earnings over this amount are taxed at 45%.

All sole traders must file a tax return and pay the associated tax due to HMRC by 31st January each year. In some cases, sole traders are required to pay payments on account toward the following tax year.

If your taxable turnover exceeds £85,000, you’ll also need to pay Value Added Tax (VAT). This threshold is calculated on a rolling 12-month basis, not a financial year. You will also need to register for VAT if you anticipate that your turnover will exceed this threshold in the next 30 days alone.

Record-keeping and accounting requirements 

When you’re a sole trader, you’ll need to keep track of all your sales and expenses. Bought a computer? Keep the receipt. Taking a train for a work appointment? Hang on to your travel ticket. Then at the end of each business year (so 6th April to 5th April the following year), you should compile all your earnings and expenses together and hand them over to your accountant.

It’s important to note that 31st January and 31st July are two annual deadlines to keep in mind. On the 31st of January following the end of your tax year, your annual tax will be due. HMRC may then request your ‘payments on account’, which are essentially advance payments on your tax, for 31st July. By paying your following year’s tax bill in two installments, you essentially ‘spread the cost’ of your taxes.

If you expect your earnings to drop from the previous year, fret not. You can apply to reduce your payments on account by logging in to your online HMRC portal. In fact, we recommend logging into your HMRC portal regularly just to keep an eye on things. And if you’re unsure about something, contact HMRC directly. After all, it’s better to be safe than sorry.

National Insurance Contributions for sole traders 

National Insurance Contributions (NICs) are payments that self-employed workers and employers must pay to fund public services like the NHS and other government departments. If you’re a sole trader without employees, you’ll need to take into account the following two types of NICs: Class 2 (if your profits exceed £6,275) and Class 4 (if you record an annual profit of over £12,570).

Business expenses you can claim as a sole trader 

When you’re self-employed, you can deduct certain business expenses to reduce your taxable profits. Some of the allowable expenses include office costs, business travel costs, staff costs, training courses related to your business and any financial costs associated with running your business such as bank charges and insurance.

You can only claim allowable expenses for business costs. If you work from home, you may be able to claim a proportion of your costs for things like heating, electricity and internet and phone use.

How to invoice clients as a sole trader 

When you’re a sole trader, you’ll need a clear understanding of the invoicing process and how to invoice clients for your work. Not only will this ensure you get paid, but it’s also legally required by law if you and your client are both registered for Value Added Tax (VAT).

When submitting your UK invoice, make sure to include the following details:

• Your name, address and contact information
• The company name and address of the client you’re invoicing
• The supply and invoicing date including the payment terms and when the payment is due
• A unique invoice number (this helps with the accounting processes)
• A clear description of the products or services your invoice covers
• The total amount being charged including VAT and additional costs

Insurance considerations for sole traders in the UK 

Growing your business as a sole trader may make you consider certain types of insurance. Depending on the goods and services involved, some clients may even require you to buy insurance before they decide to work with you.

Some of the many sole trader insurance options include personal accident or income protection in the event you’re unable to work and public liability insurance, which provides cover against claims from other people.

Growing your business as a sole trader

When you become sole trader, you’re the boss. This means you’re responsible for every aspect of the business, including growth and expansion.

There are many ways to grow your business and the best way to do so will depend on the sector you’re working in, the goods and services you trade and your budget. Here are some general tips if you do decide to grow your business.

• Understand your market and target audience and make sure your products and services solve their problems
• Deliver exceptional customer service to make your customers feel valued
• Expand your network by attending industry events, meetups and conferences
• Look after your clients by keeping in touch and offering incentives (if it feels relevant for your business)
• Scale up slowly—don’t rush into hiring more staff and expanding your products and services
• Keep abreast with market news and developments

Sole trader FAQs

What is the difference between a sole trader and a limited company?

When you go self-employed, you ultimately have the choice to become sole trader or set up a limited company.

Limited companies have different legal structures in that the business is distinct from its owner. This means that personal assets are generally protected from business liabilities. Limited companies also need to pay corproation tax on their profits and generally have more administrative responsibilities.

If you expect multiple income streams and have plans for expansion, a limited company can sometimes be more linear and tax-efficient. It ultimately depends on your earnings and circumstances.

Do I need to register as a sole trader if I have a part-time job?

If you are employed and self-employed at the same time, you will need to register as self-employed and tailor your return to include both sources of income. This applies to both full-time and part-time jobs.

How long does it take to register as a sole trader in the UK?

Once you’ve registered as a sole trader, it can take up to 15 days for HMRC to set up your Unique Taxpayer Reference (UTR).

What are the tax rates for sole traders in the UK?

Here’s a guide to the tax rates you’ll pay in each band for the 25/26 tax year when you become sole trader:

How much National Insurance do I need to pay as a sole trader?

If you earn less than £6,725 from self-employment, you won’t need to pay any National Insurance Contributions but you can choose to pay voluntary NICs if you wish. If your profits are over this amount, you’ll need to pay Class 2 NIC. For any profits over £12,570 from self-employment, you’ll also need to pay Class 4 NIC.

Class 2 NIC rates are currently £3.45 a week. Class 4 NICs are then charged at 6% on profits of £12,570 up to 50,270 and 2% on profits over £50,270.

What records do I need to keep as a sole trader?

Once you become sole trader, you must keep a record of all income and expenses. This information will help with your tax return process.

Can I claim home office expenses as a sole trader?

Yes, if you work from home, you can claim certain home office expenses such as proportions of your council tax, mortgage interest, landline rental and broadband, water rates, general household repairs and home insurance (unless your business is covered by a separate policy).

Do I need a business bank account as a sole trader?

No, you do not need a business bank account to operate as a sole trader. But having one in place can be beneficial since it helps separate your business and personal expenses, making the tax process simpler and more straightforward.

For more information and advice, read our guide on how to open a business bank account in the UK.

What information should I include on my invoices?

UK invoices should include your name, address and contact information; the company name and address of the client you’re invoicing; the supply and invoicing date including the payment terms and when the payment is due; a unique invoice reference number; a clear description of the products or services your invoice covers and the total amount being charged including VAT and additional costs.

Is business insurance mandatory for sole traders in the UK?

No business insurance is not mandatory for sole traders in the UK. But having some in place can be beneficial to protect yourself from potential liabilities or accidents that affect your ability to work.

Can a sole trader hire employees?

Yes, sole traders can hire employees but they must first register themselves as an employee with HMRC. There are some strict rules and guidelines you’ll need to follow but this guide on employing as a sole trader can help.

How can I expand or grow my sole trader business?

There are many ways you can grow and scale your sole trader business but how to do so will depend largely on the industry you’re working in and the goods and services you’re offering.

Some examples of how to grow your business include improving your products and services, developing new products and services, taking on employees, looking for additional sources of funding and working with a business mentor.

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