If you’ve recently started working for yourself — or you’re thinking about it — the question of what is a sole trader probably feels like it should have a simple answer. And in many ways it does. But in our experience, a lot of people become sole traders without fully understanding the tax obligations, the personal liability exposure, or the point at which the structure starts working against them.

According to government figures, there were 5.7 million private sector businesses in the UK at the start of 2025. The vast majority of those are small businesses, and a significant proportion are sole traders. It’s the most common way to start trading in this country — quick to set up, relatively straightforward to run, and flexible enough to suit a wide range of self-employed people.

But simple to start doesn’t mean simple to understand. Here’s what you actually need to know.

A sole trader is someone who runs a business as an individual. There’s no separate legal entity — you and the business are, in the eyes of the law, the same thing. You own all the assets, you keep all the profits, and you’re personally responsible for all the debts and obligations.

Becoming a sole trader doesn’t require registering with Companies House. What you do need to do is register with HMRC for Self Assessment, so that you can declare your income and pay tax on your profits. The registration deadline is 5 October in the tax year after you started trading — so if you began working for yourself in, say, June 2026, you’d need to notify HMRC by 5 October 2027 at the latest.

You can trade under your own name or choose a business name — there are a few restrictions (you can’t use terms like “Limited” or “PLC”), but broadly speaking you have flexibility here. Many sole traders use a trading name that’s more descriptive of what they actually do.

The structure is popular for a reason. It’s the fastest way to get started, there’s minimal administration compared to running a limited company, and the accounts don’t need to be filed publicly. For someone testing an idea, building a client base, or working as a freelancer, it’s often the right place to begin.

As a sole trader, you pay Income Tax on your profits — not on your turnover. So if your business earns £60,000 but your allowable expenses total £15,000, you’re taxed on the £45,000 profit.

The rates follow the standard Income Tax bands. For the 2025/26 tax year, you have a Personal Allowance of £12,570, after which you pay 20% on profits up to £50,270, and 40% on anything above that. You also pay Class 4 National Insurance Contributions on your profits — 6% on profits between £12,570 and £50,270, and a further 2% above that threshold. There’s also a flat-rate Class 2 NIC, which has been folded into the Self Assessment process.

You pay your tax through Self Assessment, with your tax return due by 31 January following the end of the tax year. Most people also make payments on account — advance payments towards next year’s bill — which catches a lot of first-time sole traders off guard.

If your turnover exceeds the VAT registration threshold (£90,000 as of April 2024), you’ll need to register for VAT and charge it to your customers. This is worth keeping an eye on as your business grows, because crossing that threshold has immediate compliance implications.

One thing we help a lot of clients with is understanding the difference between turnover and taxable profit — and making sure they’re claiming all the allowable expenses they’re entitled to, from home office costs to equipment to business mileage.

This is the part of the sole trader structure that doesn’t get enough attention when people are starting out. Because you and your business are legally the same entity, you have unlimited personal liability for any debts or legal claims the business incurs.

In practical terms, that means if your business can’t pay a supplier, faces a legal claim, or runs into financial difficulty, your personal assets — savings, car, home — are not protected. There’s no separation between what the business owes and what you owe personally.

For many freelancers and self-employed tradespeople, this risk is genuinely low. If you’re a graphic designer or a bookkeeper with minimal overheads and no employees, the chances of incurring serious business debts are slim. But for someone buying stock, taking on contracts with penalty clauses, employing staff, or operating in a sector where professional liability claims are a real possibility, the exposure matters.

It’s worth being honest with yourself about the nature of your work and the realistic risks involved. Professional indemnity insurance and public liability insurance can cover specific risks, but they don’t change the underlying legal structure. If the scale and nature of your business means the liability exposure feels uncomfortable, that’s usually the conversation that leads people to think seriously about incorporating as a limited company.

We’re not going to tell you that everyone should be a limited company. For a lot of people, particularly in the early stages of self-employment, sole trader is the right answer. The administration is lower, the compliance costs are lower, and for modest profit levels the tax difference between the two structures is smaller than people assume.

Sole trader tends to work well when:

• You’re testing a business idea or building your first client base
• Your annual profits are comfortably below the higher-rate Income Tax threshold
• Your work carries low liability risk and you have appropriate insurance in place
• Simplicity and low overhead matter more than tax efficiency at this stage

Where sole trader starts to create friction:

• Your profits are consistently above £40,000–£50,000 and you’re paying a significant amount at the higher tax rate
• You want to retain earnings in the business rather than drawing everything out
• Clients or contracts require you to operate through a limited company
• The personal liability exposure has become a genuine concern

The honest answer is that the right time to incorporate is different for everyone. In our experience, profit level and liability risk are the two factors that matter most — and it’s worth having a proper conversation about your specific numbers before making the switch.

One development that sole traders need to be aware of is Making Tax Digital for Income Tax (MTD for ITSA). From April 2026, sole traders and landlords with combined income above £50,000 per year will be required to use MTD-compatible software and submit quarterly updates to HMRC, rather than a single annual Self Assessment return.

The threshold drops to £30,000 from April 2027, with a further extension expected after that. So if you’re currently a sole trader earning above those levels — or heading towards them — this isn’t something to leave until the deadline approaches.

In practice, MTD means keeping digital records throughout the year and submitting quarterly summaries of your income and expenses to HMRC. It’s a shift away from the annual return model that most sole traders are used to, and the transition requires the right software and a more organised approach to bookkeeping.

We’ve been helping clients prepare for this for some time. The businesses that will find it easiest are those already using cloud accounting software like Xero or QuickBooks — because the quarterly reporting largely runs in the background once your bookkeeping is in order. The ones who’ll feel it most are those still working from a spreadsheet or a shoebox of receipts at year end. If that’s you, now is a sensible time to get things in order.