Sole Trader Tax

Operating as a sole trader is the simplest way to run a business in the United Kingdom. You are self-employed, personally responsible for all profits and losses, and must report your business income to HMRC each year through the Self Assessment tax return. Unlike a limited company, there is no legal separation between you and your business — your personal assets are at risk, but the administrative burden is significantly lighter. This guide covers registration, National Insurance, the trading allowance, allowable expenses, and how to complete the self-employment pages of your return.

Registering as a Sole Trader

You must register with HMRC as a sole trader by 5 October following the end of the tax year in which your self-employed income exceeds £1,000. Registration is free and can be completed online via GOV.UK. You will receive a Unique Taxpayer Reference (UTR) and a letter activating your Government Gateway account. You must then file a Self Assessment return each year, even if your profits fall below the taxable threshold. Failure to register can result in penalties starting at £100.

Class 2 and Class 4 National Insurance

As a sole trader, you pay two types of National Insurance. Class 2 NIC is a flat weekly amount of £3.45 (2025/26) for those whose profits exceed £6,725 per year. If your profits are below this threshold but above £1,000, you can pay voluntarily to protect your entitlement to certain benefits, including the State Pension. Class 4 NIC is calculated on your annual profits at a rate of 6% on profits between £12,570 and £50,270, and 2% on any profits above £50,270. Class 4 NIC is calculated and paid as part of your Self Assessment, alongside your Income Tax liability.

Trading Allowance

If your gross turnover from self-employment is £1,000 or less in a tax year, you do not need to register with HMRC or file a return. This is known as the trading allowance. If your turnover exceeds £1,000 but is £1,000 or less after deducting expenses, you can use the trading allowance to reduce your taxable profit to nil. You cannot claim the trading allowance and claim actual expenses — you must choose whichever gives the better result. The trading allowance also covers income from casual services and the sharing economy (such as selling goods online or freelance platform work).

Allowable Expenses

Sole traders can deduct a wide range of expenses from their turnover, provided they are incurred wholly and exclusively for business purposes. Common allowable expenses include office costs (stationery, phone bills, internet), travel (vehicle costs, public transport, accommodation), staff costs (salary, pension contributions), professional fees (accountants, solicitors), premises costs (rent, business rates, utilities), and the cost of goods for resale. You can also claim a flat rate for working from home — £6 per week (£26 per month) — or claim the exact proportion of household bills relating to your business use. For vehicle expenses, you can use HMRC's approved mileage rates: 45p per mile for the first 10,000 business miles and 25p per mile thereafter.

Accounting Basis

Most sole traders use the cash basis, meaning you record income when it is received and expenses when they are paid. The cash basis is simpler and is the default for businesses with turnover under £150,000. Alternatively, you can use traditional (accruals) accounting, which records income when you invoice and expenses when you incur the liability, regardless of when money changes hands. Accruals accounting gives a more accurate picture of your business performance and is required if your turnover exceeds £150,000 or if you are a company. Once you choose an accounting basis, you should apply it consistently from year to year.

Year-End Adjustments

When preparing your accounts for the Self Assessment return (form SA103S for short returns or SA103F for full returns), you must account for year-end adjustments. These include closing stock and work in progress (unsold goods and partially completed jobs), prepayments and accruals (expenses paid in advance or owed but unpaid), and capital allowances (claims for the cost of business assets such as equipment, vehicles, and machinery). Depreciation is not deductible for tax purposes — instead, you claim Capital Allowances. Use simplified expenses where available: the flat-rate basis for vehicles, home working, and private use of business premises.

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