What is a sole trader in the UK?

A sole trader is someone who runs their own business as an individual. You and the business are legally the same entity. You keep all profits after tax but are personally liable for any debts.

How much does it cost to become a sole trader?

£0 to register. You simply tell HMRC you're self-employed (via the online Self Assessment registration). There are no Companies House fees or share capital requirements.

What is a Sole Trader?

A sole trader is the simplest UK business structure where you run a business as an individual, keeping all profits but bearing full personal liability.

Quick Answer: A sole trader (also called self-employed) means you and your business are the same legal entity. Registration is free via HMRC Self Assessment. You pay Income Tax (20-45%) and National Insurance on profits. All business debts are your personal responsibility. Setup takes minutes, admin is minimal, but you have unlimited liability.

Last reviewed: 12 June 2026 | Reading time: 6 minutes | Verified against 9 sources

How Sole Trader Status Works

When you work as a sole trader, you are the business. There's no separate legal entity. This means:

Business income is your personal income
Business debts are your personal debts
You file one tax return (Self Assessment) covering everything
You can trade under your own name or a business name
The business ends when you stop trading or die

The main distinction from a limited company is unlimited personal liability. If the business fails owing £50,000, creditors can claim against your personal assets (house, savings, etc.).¹

How to Register as a Sole Trader

Registration is straightforward and free:

Register for Self Assessment at gov.uk (must do by 5 October after the tax year you started trading)²
Choose a trading name (optional — you can use your own name)
Start trading (no waiting period, no Companies House registration)
Keep records of income and expenses from day one

Registration cost: £0 (free Self Assessment registration)
Time to start trading: Immediately (register within deadline)
Annual admin: Self Assessment tax return only (by 31 January)
Typical accountancy fees: £300-800/year (or DIY for free)

Tax as a Sole Trader

Sole traders pay tax on profits (income minus allowable expenses):

Income Tax

Standard rates for 2026-27:³

Personal allowance: £0-12,570 = 0%
Basic rate: £12,571-50,270 = 20%
Higher rate: £50,271-125,140 = 40%
Additional rate: over £125,140 = 45%

National Insurance

You pay two types of NI:⁴

Class 2 NI: £3.45/week if profit over £12,570 (paid via Self Assessment)

Class 4 NI:

9% on profits £12,570-50,270
2% on profits above £50,270

Example Calculation

Profit: £40,000/year

Income Tax: (£40,000 - £12,570) × 20% = £5,486
Class 2 NI: £3.45 × 52 weeks = £179
Class 4 NI: (£40,000 - £12,570) × 9% = £2,469
Total tax: £8,134 (20.3% effective rate)

Compare this to a limited company paying 19% Corporation Tax plus dividend tax when extracting. For £40k profit, sole trader typically pays £500-1,500 more than Ltd.⁵

Allowable Expenses

You can deduct business expenses from your income before tax:⁶

Office costs (rent, utilities, equipment)
Travel for business purposes
Stock and materials
Accountancy and legal fees
Marketing and advertising
Professional memberships and subscriptions
Work from home allowance (£6/week simplified, or actual costs)

Keep receipts and records for at least 5 years.

Advantages of Sole Trader

Free and instant setup (no registration fees or delays)
Minimal admin (one tax return per year)
Privacy (no public accounts filing)
Keep all profits (after tax — no dividend restrictions)
Simple record-keeping (bank statements + receipts often enough)
Lower accountancy costs (£300-800 vs £800-2,000 for Ltd)
Can offset losses against other income

Disadvantages and Risks

Unlimited personal liability (biggest risk)
Higher tax for profits over £30k (vs limited company)
Less credibility with some corporate clients
Cannot raise equity investment (loans only)
Hard to sell the business (it's tied to you personally)
All profit taxed immediately (cannot retain earnings tax-efficiently)

When to Choose Sole Trader

Sole trader status works well when:

You're starting out and want to test the idea with minimal setup
Profit is under £30,000/year (tax difference vs Ltd is small)
Business risk is low (e.g., consultancy, freelance writing, tutoring)
You value simplicity and privacy over tax efficiency
You don't need to raise investment

When to Switch to Limited Company

Consider switching when:⁷

Profit consistently exceeds £30,000 (tax savings justify extra admin)
You face financial risk (large contracts, high-value stock, potential legal claims)
Corporate clients prefer Ltd suppliers
You want to bring in co-founders or sell equity

Switching is straightforward — close your sole trader Self Assessment and register a new company. See our detailed comparison.

Sources

GOV.UK — Set up as a sole trader, accessed 2026-06-12
HMRC — Register for Self Assessment, accessed 2026-06-12
HMRC — Income Tax rates 2026-27, accessed 2026-06-12
HMRC — Self-employed National Insurance rates 2026-27, accessed 2026-06-12
Tax comparison: sole trader vs limited company, £40k profit scenario
HMRC — Allowable expenses for self-employed, accessed 2026-06-12
GOV.UK — Working for yourself decision tree, accessed 2026-06-12

Last reviewed: 12 June 2026