Sole Trader / Self-Employed – The Enterprise Hub

Southwark Pioneers Fund: Launchpad

Learning Objectives:

By the end of this lesson, you will be able to:

Understand the key characteristics of operating as a sole trader.
Know your tax and National Insurance obligations as a self-employed person.
Understand the management and control responsibilities that fall on you as the owner.
Follow the correct process for registering as self-employed with HMRC.
Weigh up the advantages and disadvantages of this structure for your business.

What is a Sole Trader?

A sole trader — also known as self-employed — is the simplest and most common legal structure for starting a business in the UK. There is one business owner, minimal set-up requirements, and very little administration.

Key characteristics:

Also known as self-employed.
One business owner.
Requires minimal set-up, regulations and administration.
Common for most new businesses, and open to any legal business activity.
No requirement to open a separate bank account, though it is recommended for clarity.
Regulated by HMRC (Her Majesty’s Revenue and Customs).
No registration fee.

Taxation

As a sole trader, you are personally responsible for all taxes on your business profits. You must:

File an annual Tax Return / Self-Assessment (due by 31 January).
Pay income tax on your profits (due by 31 January for England and Wales).

Income tax rates are cumulative and subject to change on Budget Day (6 April each year). The following rates applied up to 5 April 2026:

Personal Allowance: 0% on income up to £12,570 (less if you earn over £100,000; no allowance above £125,000).
Basic Rate: 20% on income from £12,571 to £50,270.
Higher Rate: 40% on income from £50,271 to £125,140.
Additional Rate: 45% on income over £125,140.

Worked Example

As a sole trader, you made a profit of £60,000 during the financial year. How much tax do you estimate you will pay?

Personal Allowance: 0% on first £12,570 = £0
Basic Rate: 20% on £37,699 (£12,571–£50,270) = £7,539.80
Higher Rate: 40% on £9,729 (£50,271–£60,000) = £3,891.60

Total estimated tax liability: £11,431.40

National Insurance Contributions

Three types of National Insurance apply to sole traders:

Class 2: Treated as paid on profits from £6,845 per year — no payment required. Voluntary contributions are available for profits below this threshold.
Class 4: 6% on profits between £12,570 and £50,270; and 2% on profits over £50,270.

You must also register for VAT once your annual turnover reaches £85,000.

If you employ staff, you will need to register as an employer with HMRC to manage income tax and National Insurance contributions through PAYE / payroll.

Management and Control

As a sole trader, there is no legal distinction between you and the business. This means:

You have full responsibility for managing the business.
You must keep records of all income and expenses.
You are personally responsible for all losses, debts, and any legal actions against the business.
All profits belong to you and are subject to income tax.
You can take money from the business as Drawings. These are not deductible expenses — they are taxable as part of your profit.
All allowable business expenses must be wholly and exclusively incurred for business purposes.

Business Registration

Check whether your intended trading name is available as a domain name, if applicable.
You have the option to register your business name as a Trade Mark (™).
Refer to the Step by Step Guide for Registering as a Sole Trader / Self-Employed.
Complete your online registration with HMRC. This also registers you for your first Self-Assessment.
No registration fee applies.

Advantages

Low cost to set up and run.
Easy to get started with minimal administration.
Full ownership and control retained by the owner.
Very little financial reporting required.

Disadvantages

All liabilities — losses, debts, and legal actions — fall personally on the owner.
Heavier tax burden compared to a private limited company.
May not always be seen as credible by larger corporate clients.

Reflection

Think about your own business idea. Is a sole trader structure right for you? Consider how much personal financial risk you are comfortable with, and whether you are likely to need to trade with large companies or apply for significant contracts.