What is a sole trader?

A sole trader is a self-employed individual who owns and runs their own business as an individual. Their business isn’t a separate legal entity to its owner – a sole trader is their business. 

Being a sole trader means you have complete control over your business, all its assets and any profits after tax. As well as giving you total control, this business model has several advantages including being relatively straightforward and versatile.  

However, unlike owners of limited companies, sole traders are personally liable for all their business’ debts your personal assets could be at risk if you are unable to pay your creditors. This unlimited liability for events that occur while operating your business and the pressure involved in you having to bear the brunt of all the responsibility can present you with several significant challenges. 

While the definition of a ‘sole trader’ is often used instead of ‘self-employed’ when describing this type of business model, be careful as the terms do have slightly different meanings.  

What are the characteristics of a sole trader? 

A main feature of being a sole trader is that your business is entirely owned and managed by you with no separation between the management and the ownership of your business. 

If you are a sole trader, you do not need to file accounts or any other documents with Companies House, but you must register with HMRC as soon as possible after starting your business.

As a sole trader, you will pay income tax and National Insurance Contributions (NICs) – but not Corporation Tax – on your business’ profits. You will also be required to complete and submit a self-assessment tax return each year. 

The deadline for registering for self-assessment with HMRC is the 5th October after the first tax year in which you start trading. The income tax year runs from 6th April to 5th April. For example, if you start trading on 30th July 2026, you must register with HMRC by 5th October 2027. 

Depending on your business’ turnover, you may also need to pay VAT. The current VAT threshold is £90,000 per year (2026/27). 

What is a personal service company (PSC)? 

Some sole traders decide to operate through a personal service company (PSC) set up to act as an intermediary between themselves and their clients or customers. There are special tax and NICs anti-avoidance rules, including the IR35 regulations, which apply in such cases and you should seek support from an accountant if you have structured your business this way. 

What’s the difference between ‘sole trader’ and ‘self-employed’?

A sole trader is always self-employed for tax purposes, but not everyone who is self-employed is a sole trader. Self-employed means that you are not employed by someone and you do not pay tax through Pay As You Earn (PAYE). Most self-employed individuals run businesses that use the sole trader structure, but they could also be part of a partnership or be a director in a limited company.

What are examples of sole traders?

The sole trader structure is the one most used within the services sector. Common examples of sole traders may include: 

• Electricians 
• Gardeners 
• Plumbers 
• Decorators and Plasterers 
• Hairdressers 
• Personal tutors 
• Freelance writers 
• Fitness instructors 

Can a sole trader employ staff?

It is a common misconception that sole traders cannot employ staff and while it is true that sole traders operate and own their businesses, they can also employ staff to carry out work for them. If you do employ staff, you will be responsible for collecting income tax and NICs from employees and paying these to HMRC on their behalf. You will need to operate a PAYE scheme to do this.  

What are the legal obligations and responsibilities of a sole trader?

Setting up your own business as a sole trader may be the most straightforward option for a new start-up but you will still have to meet several sole trader responsibilities and legal obligations.

File a self-assessment tax return

As a sole trader, you need to file a self-assessment tax return and pay any tax by 31st January after the end of the tax year.

Filling your tax return means you need to record details of your sales and expenses, as well as receipts and other relevant records. Keeping on top of your bookkeeping is vital, and can be done easily using online software such as QuickBooks, Xero and Dext. 

Make National Insurance Contributions

As a sole trader, you may need to make Class 4 NICs, but if your profits are less than £7,105 per year, you can choose to make voluntary Class 2 NICs. 

Class 4 NICs will be automatically calculated as 6% of your profits over the personal allowance of £12,570 but below the higher rate tax threshold of £50,270 and will be calculated when you complete your Self-assessment Tax Return.  Above the higher rate tax threshold, you pay Class 4 NICs at 2% (all thresholds and rates as at 2026/27) 

If your profits are £7,105 or more Class 2 NICs is treated as paid but no payment is required. If your profits are less than £7,105 you can make voluntary Class 2 NICs at £3.65 per week (2026/27). 

Register for VAT

Registering for VAT is optional if your turnover is less than £90,000, however if you exceed this threshold, you must be VAT registered.

If you do register for VAT, you will need to complete VAT returns and keep your bookkeeping records up to date. You can register for VAT online to receive your VAT number and you will get an online VAT account through which you can file your VAT returns. 

If you intend to carry out business-to-business work but your turnover is under the £90,000 threshold, registering for VAT may still be advisable. It will enable you to claim back the input VAT on your work-related purchases and pass on the VAT you will be charging to your clients, without having to increase the price of your own products or services.

Register for PAYE if you employ staff 

As mentioned earlier, as a sole trader, you can employ staff to help you in your business. You will need to decide whether you want full-time or part-time workers or may prefer the flexibility of working with freelancers. 

Should you opt to have staff on your payroll, you are legally required to register for PAYE to collect tax and NICs from your workers, which you will then pay to HMRC. You will need to register online for a PAYE reference number and may be required to set up an employer’s workplace pension scheme under the auto-enrolment rules.  

Bear in mind that if you do opt to employ staff, your business will need to generate enough income to pay them a weekly, or more commonly, monthly. If you choose to look after PAYE on your own, you may need to subscribe to an online bookkeeping solution that also offers payroll services.

And as an employer, you are legally bound to pay your staff the National Minimum or Living Wage at the very least.

Having staff working on your premises will mean you will need to get employers’ liability cover. In addition, you may face other legal requirements if you have employees such as those contained in the Employment Rights Act.

Do you need to join Making Tax Digital (MTD) for income tax? 

From 6th April 2026, some sole traders and landlords are required to join MTD for income tax instead of self-assessment. For the 2026/27 tax year, those with £50,000 or more qualifying income per their 2024/25 filed self-assessment tax return are required to join.  

In 2027 this will be reduced to £30,000 of qualifying income and from 2028 it will be £20,000. For more about MTD for income tax, click here.  

Last updated: 27th July 2026