A sole trader is a self-employed person who owns and runs their business as an individual. There is no company and no separate legal entity: you and the business are the same person in law. A sole trader therefore has unlimited liability, so you are personally responsible for all the business's debts. Profits are taxed as your own income through Self Assessment. You must register with HMRC once your trading income goes over £1,000 a year.
Is a sole trader limited or unlimited?
Unlimited. This is the single biggest difference from a limited company. HMRC's guidance describes sole trader businesses as having "unlimited liability". If the business cannot pay a supplier, a landlord or a court award, the creditor can pursue your personal assets, including savings, property and other possessions.
A limited company is a separate legal person. Its shareholders' liability is limited to what they invested, and the company owes its own debts. Our guide to what a limited company is explains that structure and where its protection stops.
Insurance can manage some of the risk. Professional indemnity, public liability and business interruption cover protect against specific claims. None of them changes the legal position that the business's debts are yours.
How you become a sole trader
There is nothing to incorporate and no Companies House filing. You can start trading straight away, under your own name or a trading name. What you must do is tell HMRC:
- The £1,000 trigger. If your gross trading income in a tax year is £1,000 or less, the trading allowance means you may not need to tell HMRC at all. Above that, you register for Self Assessment;
- The registration deadline. Register by 5 October after the end of the tax year in which you started. For 2025/26 that was 5 October 2026, and HMRC warns of a penalty if you tell it later;
- VAT. Register if your taxable turnover for the last 12 months goes over £90,000, or you expect it to exceed £90,000 in the next 30 days alone.
You may also need licences, permits or insurance depending on what you do. Keep business records from day one, because you will need them to work out your profit.
How sole traders are taxed
You pay income tax and National Insurance on your profit: income less allowable expenses. Instead of claiming expenses, you can deduct the £1,000 trading allowance if that gives a better result. For 2026/27 the rates are as follows; the income tax bands shown apply in England, Wales and Northern Ireland, and Scotland sets its own:
| Tax | 2026/27 |
|---|---|
| Personal allowance | £12,570 |
| Income tax: basic rate | 20% on £12,571 to £50,270 |
| Income tax: higher rate | 40% on £50,271 to £125,140 |
| Income tax: additional rate | 45% over £125,140 |
| Class 4 National Insurance | 6% on profits £12,570 to £50,270; 2% above |
| Class 2 National Insurance | Treated as paid if profits are £7,105 or more; voluntary rate £3.65 a week |
If your profits are at or above the small profits threshold, HMRC says Class 2 contributions "are treated as having been paid to protect your National Insurance record". Below the threshold you do not have to pay anything, but you can choose to pay voluntarily. The 2025/26 figures were £6,845 and £3.50 a week. The personal allowance is reduced by £1 for every £2 of adjusted net income above £100,000.
An illustration (not an HMRC figure). A sole trader outside Scotland with a 2026/27 profit of £40,000 and no other income would pay income tax of £5,486 (20% of £27,430) and Class 4 National Insurance of £1,645.80 (6% of £27,430), a total of £7,131.80. All of the profit is taxed whether or not it is drawn from the business.
Deadlines and Making Tax Digital
For the 2025/26 tax year, the online return and the balance of tax are due by 31 January 2027, and a paper return was due by 31 October 2026. Many sole traders also make payments on account towards the following year on 31 January and 31 July.
Making Tax Digital for Income Tax is now live for the largest sole traders. You had to start from 6 April 2026 if your qualifying income from self-employment and property was over £50,000 in 2024/25. The threshold falls to £30,000 (based on 2025/26 income) from 6 April 2027, and to £20,000 (based on 2026/27 income) from 6 April 2028. Within MTD you keep digital records and send quarterly updates through compatible software. HMRC's eligibility guidance explains how qualifying income is measured, and our guide to MTD for sole traders covers the practical side.
Advantages and disadvantages
- Simplicity. No incorporation, no public accounts and no Companies House filings. HMRC calls it the simplest business structure to set up and keep records for;
- Privacy. Your accounts go to HMRC, not to a public register;
- Control. You make every decision and keep all the profit after tax;
- Unlimited liability. Business debts are personal debts;
- Tax on all profits. You cannot leave profits in the business to be taxed at corporation tax rates, so higher-earning sole traders often compare the position with a company;
- Credibility. Some larger clients and lenders prefer to deal with a limited company.
Many businesses start as sole traders and incorporate later once profits, risk or the need for investment justify the extra administration. The comparison is worth running with real figures rather than rules of thumb, because the April 2026 increase in dividend tax rates has changed the arithmetic for owner-managed companies.
The official starting point is gov.uk's guide to setting up as a sole trader. If you want your records, Self Assessment and MTD submissions handled, or a clear comparison with incorporating, our accountants for sole traders can help. Our Self Assessment service covers the annual return.