Set up as a sole trader

Being a sole trader is the simplest way to run a business. You keep all profits after tax, but you're personally responsible for any business debts. There's no legal distinction between you and your business.

What you need to do

1. Choose a business name (optional - you can trade under your own name)
2. Register with HMRC for Self Assessment
3. Keep records of income and expenses
4. File a tax return and pay tax annually

If you are claiming benefits, check how self-employment affects your claim before you start trading.

Registration requirements

When to register

You must register with HMRC for Self Assessment by 5 October in your second tax year of trading.

For example, if you start trading on 1 May 2026, register by 5 October 2027. If you start in February 2027, the deadline is the same, because both dates fall in the 2026 to 2027 tax year.

If you earn over £1,000 from self-employment in a tax year, registration is mandatory. Below £1,000, registration is optional but recommended for mortgage or credit applications.

Registration process

1. Register online through HMRC Self Assessment
2. Provide your National Insurance number, personal details, and trading start date
3. HMRC sends your Unique Taxpayer Reference (UTR) within 10 working days
4. Receive a separate activation code for your business tax account (within 7 days)

If you register after 5 October and don't pay all the tax you owe by 31 January, you may get a 'failure to notify' penalty based on the unpaid tax. Filing your return late costs £100, with further penalties after 3, 6 and 12 months.

Business bank account

A separate business bank account is not a legal requirement, but it is strongly recommended, and most personal account terms prohibit business use. A separate account:

• Simplifies tax filing and expense tracking
• Establishes credibility with customers and suppliers
• Reduces risk of mixing personal and business expenses
• Makes it easier to accept card payments

Record-keeping requirements

You must keep records of all business income and expenses.

What to keep

Keep the invoices you issue, till receipts and bank statements for your sales; purchase invoices, receipts and mileage logs for your expenses; a record of the money you take from the business for yourself; and VAT records if you are registered for VAT.

How long to keep records

Keep records for at least 5 years after the 31 January filing deadline for the tax year. For example, keep the records for your 2024 to 2025 return until 31 January 2031.

You can be fined up to £3,000 per tax year for inadequate records.

Tax and National Insurance

What you'll pay (2026/27)

• Income Tax is 20% on income from £12,571 to £50,270, 40% from £50,271 to £125,140 and 45% over £125,140.
• Class 4 National Insurance is 6% on profits from £12,570 to £50,270 and 2% on profits above that.
• You no longer have to pay Class 2 National Insurance, but you can pay it voluntarily (£3.65 a week in 2026/27) to protect your State Pension.

Key deadlines

• Register for Self Assessment by 5 October if you are new.
• File your online tax return and pay the tax you owe by 31 January.
• Make your second payment on account, if you have one, by 31 July.

Tax reliefs available

Sole traders can claim various allowances to reduce their tax bill:

Making Tax Digital preparation

From April 2026, sole traders earning over £50,000 must use MTD-compatible software for digital record-keeping and quarterly reporting.

The threshold falls to £30,000 from April 2027 and to £20,000 from April 2028.

If your income is close to a threshold, start using compatible software before it applies to you - options include QuickBooks, Xero, FreeAgent, and spreadsheets with HMRC-compatible bridging software.