13 things you should know about being a sole trader

Thinking of starting your own small business or going freelance? Many people choose to become a sole trader (AKA self-employed), but before making your decision, what key facts do you need to know about becoming a sole trader?

1. Sole trader is the most popular 'business' format

According to the Government, in 2024, 74% of British businesses were sole traders (they did not employ anyone other than the owner), that's about 4.15 million businesses out of a total of 5.6 million. Sole traders - often alternatively called the "self-employed" - drive the UK economy. A sole trader is the exclusive owner of their business. What about sole trader tax? When you're a sole trader, you pay tax on your profits and keep what's left, also taking into account any allowances and reliefs.

2. Registering as a sole trader is quick and easy

You'll need to register for self assessment to pay sole trader tax. Self assessment is the system HMRC uses to collect income tax. Registering to become a sole trader can be done online very quickly. If you haven't registered to become a sole trader before, HMRC will send you a letter with your 10-digit Unique Taxpayer Reference (UTR) and set up your account for the self assessment online service.

If you have filed a tax return online before, you'll need to re-register by filling out form CWF1. You'll need your 10-digit UTR from when you registered before. You can find out your UTR if you don't know it. You'll need to register with HMRC for the Construction Industry Scheme if you're working in the construction industry as a subcontractor or contractor.

You should register as soon as you become self-employed. The latest you can register with HMRC is by 5 October after the end of the tax year during which you became self-employed. The tax year runs from 6 April one year to 5 April the next. Register too late to pay sole trader tax or not at all and there can be severe penalties.

Next step: Register for self assessment

3. Being a sole trader involves some personal financial risk

As a sole trader, you are the business. It's not a separate legal entity, as it would be if you formed a limited company. Therefore, you're liable for your business' debts. If you're starting a business that won't build up big debts, becoming a sole trader isn't too risky. However, if you give personal guarantees, borrow money you can't pay back or run out of cash, your business and personal assets could be a risk.

4. You might need insurance as a sole trader

Some insurances are required by law such as vehicle insurance and employers' liability insurance if you take on staff. You can also take out insurance to mitigate some risks such as business interruption. 

If you are likely to build up significant debts or you are unwilling to take on the personal risk, setting up a limited company would be a less risky option - although you are still likely to need some insurance to protect against certain events.

5. Sole traders can still employ people

74% of small businesses do not employ anyone other than the 'founder'. However, that doesn't mean you can't employ people to work for you. If you do employ people, you must collect income tax and National Insurance contributions (NICs) from them and pay these to HMRC. You'll need to operate a PAYE (Pay As You Earn) payroll scheme for this purpose.

Next steps: Register as an employer

6. Sole trader tax is simple enough to understand

As a sole trader, you pay income tax based on your business profits. You (or your accountant) must fill in a self assessment tax return each year, detailing your income and expenses. If your annual profits are more than £12,570 (2025/26), you'll have to pay Class 4 NICs. You pay this with your income tax and the figure is calculated from your self assessment tax return.

Making Tax Digital for income tax will be rolled out from April 2026. Sole traders and landlords will be required to keep digital records and update HMRC at least once  a quarter. You should consider using accounting software that is compatible with MTD for IT from day one.

Next steps: choose an accounting software package

7. Sole traders must also keep detailed financial records

That includes details of all your sales. You must also keep proof of any expenses (eg receipts, invoices, utility bills, etc for any stock and supplies or other outgoings you might have). In any case, these will help when filling in your tax returns. Keeping basic financial records (aka bookkeeping) doesn't have to be as arduous as it might sound and can be made far simpler with accounting software.

8. Some sole traders must be VAT-registered

If your turnover exceeds the VAT threshold of £90,000 per year, you will need to register for VAT. When you're VAT registered, you charge your customers VAT on VAT-able sales and pay it to HMRC. In turn, you can reclaim the VAT you pay on goods and services you buy.

Next step: Register for VAT

9. Sole trader businesses can become limited companies

The size and nature of your business can change quickly. And for a range of reasons (including increased exposure to risk), you might want to set up your own limited company ("incorporate") at a later stage. Providing someone else hasn't already registered the name, you should be able to use your sole trader name (with Ltd added, of course).

10. 31 January and 31 July are key sole trader tax dates

Sole traders pay tax on the 31 January following the end of their tax year. Crucially, HMRC will request payments on account for the following year's estimated tax - on 31 January and 31 July each year. That means, after your first year in business, your tax bill could be 150% of what you were expecting to pay, with another 50% payable in July. From April 2026, Making Tax Digital for Income Tax will mean that sole traders with a gross trading or rental income of more than £50,000 will need to keep digital records that are updated regularly (at least quarterly). By 2028, the threshold will be £20,000.

11. Sole traders should open a separate business bank account

Although it's not a legal requirement, you should consider opening a dedicated business bank account. It will make it easier to keep your business and personal affairs separate. Keeping them separate also makes it easier to keep track of your business income and expenses and to complete your self assessment tax, VAT and PAYE returns. There's a wide range of online and high street business bank account providers and the best one for your sole trader business will depend on what services you want from your bank.

Next step: find the best bank account for you

12. Put money aside each month to cover your tax

It's good practice to put some money aside each month to cover your tax bills. When it comes time to pay HMRC, you'll be glad you put a few quid away each month. Being faced with a large tax bill you haven't saved for is a nightmare. Try to put 25% of your earnings into a separate bank account (and don't dip into it). Failing to pay your tax bill on time will result in penalty charges.

13. Sole traders have to wear many hats

Crucially, you've got to be good at sales and marketing. If you don't make enough sales, your business will fail - simple. There will be admin tasks to take care of too, including simple accounting/bookkeeping. Paying an accountant to do your tax return can save you time, but you'll still have to maintain simple financial records. Having to manage employees for the first time could prove a big challenge, too. Online business tools such as Google Workspace will help you manage your admin better and allow you to communicate and collaborate with customers, staff and suppliers.