Sole traders pay income tax and Class 4 National Insurance on their profits, meaning income minus allowable expenses, through Self Assessment. For 2026/27, the first £12,570 of profit is covered by the personal allowance. Profit above that is taxed at 20% up to £50,270, 40% up to £125,140 and 45% above (Scotland has its own bands). Class 4 National Insurance is 6% on profits between £12,570 and £50,270 and 2% above. Class 2 is no longer compulsory. You must register once your trading income exceeds £1,000 in a tax year. VAT registration is required once taxable turnover passes £90,000.
How much tax does a sole trader pay?
A sole trader's profit is added to any other income they have, such as a salary, rent or a pension, and taxed at the normal income tax rates. The table shows 2026/27 rates for profits alone in England, Wales and Northern Ireland.
| Profit band | Income tax | Class 4 NIC |
|---|---|---|
| Up to £12,570 | 0% | 0% |
| £12,571 to £50,270 | 20% | 6% |
| £50,271 to £125,140 | 40% | 2% |
| Over £125,140 | 45% | 2% |
The personal allowance is withdrawn above £100,000 of income. Scottish sole traders pay Scottish rates (19% to 48%) on their profits but the same UK Class 4 rates. See Scottish tax bands.
Worked illustrations, assuming no other income (not HMRC figures):
- £40,000 profit. Income tax £5,486 plus Class 4 £1,645.80, a total of £7,131.80;
- £60,000 profit. Income tax £11,432 plus Class 4 £2,456.60, a total of £13,888.60.
National Insurance for sole traders
Class 4 is the profit-related contribution described above. It is collected with your income tax and does not count towards your State Pension.
Class 2 has not been compulsory since 6 April 2024. If your profits are £7,105 or more, Class 2 is treated as paid, so you get a qualifying year for the State Pension without paying. If your profits are lower, you can pay voluntarily at £3.65 a week to protect your record. Our guide to Class 2 National Insurance explains when that is worth doing.
Working out your taxable profit
- Allowable expenses. Costs incurred wholly and exclusively for the business, such as stock, materials, business travel, phone and software costs and professional fees, are deducted from income. Personal or private use elements are not;
- Cash basis. This is now the standard method for sole traders. You record income when you receive it and expenses when you pay them. You can choose traditional accrual accounting instead, which may suit businesses with stock or bank finance;
- Trading allowance. If your gross trading income is £1,000 or less, it is tax-free. Above that, you can deduct a flat £1,000 instead of your actual expenses, which helps where expenses are minimal;
- Capital items. Under the cash basis, equipment you buy to keep and use in the business is claimed as a normal allowable expense, except cars, which have their own rules. Under traditional accounting, equipment gets capital allowances instead.
A trading loss can be set against your other income for the loss-making year, the previous year or both. Alternatively it can be carried forward against future profits of the same trade. Restrictions apply, so take advice before relying on loss relief.
Registration and deadlines
- Register for Self Assessment. You must register once your self-employed income passes £1,000 in a tax year. The deadline is 5 October after the end of that tax year (5 October 2026 for 2025/26). Registering late can mean a penalty;
- File and pay. The online return and payment for 2025/26 are due by 31 January 2027;
- Payments on account. Once your Self Assessment bill is £1,000 or more, you pay half of it in advance on 31 January and half on 31 July, unless more than 80% of your tax was collected at source. This makes the first year's January bill unusually large. See our guide to the 31 July deadline.
Making Tax Digital for sole traders
Making Tax Digital for Income Tax is now live. It is phased in according to "qualifying income": your total self-employment and property income before expenses, taken from your previous tax return.
- From 6 April 2026. Qualifying income over £50,000 in 2024/25;
- From 6 April 2027. Over £30,000 in 2025/26;
- From 6 April 2028. Over £20,000 in 2026/27.
If you are in, you keep digital records in compatible software and send quarterly updates by 7 August, 7 November, 7 February and 7 May, then a final tax return. Our guide to MTD for sole traders covers the detail.
VAT for sole traders
VAT is separate from income tax. You must register if your taxable turnover (not profit) for the last 12 months goes over £90,000, or if you expect it to exceed £90,000 in the next 30 days alone. Below the threshold you can register voluntarily, which can make sense if your customers are VAT-registered businesses and you buy a lot of standard-rated supplies.
Sole trader or limited company?
Sole trading is simple and cheap to run, but you are personally liable for all the debts of the business, and profits are taxed in full every year whether you draw them or not. A limited company pays corporation tax on its profits, and you then pay tax on any salary and dividends you take. The comparison depends on profit level, how much you need to draw, and the higher dividend rates from April 2026. It needs real numbers, not a rule of thumb. Our guide on whether an accountant for a sole trader is worth it covers the practical side.
Acumon works with sole traders through our accountants for sole traders service, covering registration, bookkeeping, MTD quarterly updates and annual returns. Our self assessment team can review whether your expenses, allowances and payments on account are set correctly.