What Is a Sole Trader? Meaning, Examples & How It Works (UK)

Being a sole trader is the most common — and simplest — way to run a business in the UK. Millions of freelancers, contractors, tradespeople and small online sellers operate this way. But “sole trader” is also one of the most misunderstood terms in business, so let’s clear it up.

This guide explains what a sole trader actually is, how the tax works, the pros and cons, and how to tell when it’s time to consider a limited company instead.

What is a sole trader?

A sole trader is a self-employed person who owns and runs their business as an individual. Legally, you and your business are the same person — there’s no separate company. You keep all the profits after tax, and you’re personally responsible for any debts the business runs up.

That single fact drives everything else about being a sole trader: how you register, how you’re taxed, and what happens if things go wrong. It’s the opposite of a limited company, which is a separate legal “person” in its own right.

In short, as a sole trader:

• You own 100% of the business and keep all the post-tax profit.
• You report your income through Self Assessment, not company accounts.
• You have unlimited liability — your personal assets aren’t ring-fenced from business debts.
• You can trade under your own name or a business name (without registering it at Companies House).

Sole trader vs self-employed: are they the same?

This trips a lot of people up. The two terms overlap but aren’t identical:

• Self-employed describes how you work and pay tax — you work for yourself rather than for an employer who deducts tax through PAYE.
• Sole trader describes your legal structure — a self-employed individual trading on their own, rather than through a partnership or limited company.

So almost every sole trader is self-employed, but a self-employed person could instead be a partner in a partnership or run their own limited company. If you’re a one-person business who hasn’t set up a company, you’re a sole trader.

Sole trader examples

You’ll find sole traders in almost every industry. Common examples include:

• Freelancers — designers, writers, developers, consultants
• Tradespeople — electricians, plumbers, builders, decorators
• Drivers — taxi, private hire and delivery drivers
• Online sellers — eBay, Etsy and small Amazon sellers
• Personal services — hairdressers, personal trainers, tutors, cleaners

Advantages and disadvantages of being a sole trader

Advantages

• Quick and cheap to set up — you just register with HMRC, with no Companies House filing or fees.
• Simple admin — one Self Assessment tax return a year, rather than company accounts and corporation tax.
• Privacy — your details aren’t published on a public register, unlike a company’s.
• You keep all the profit and have complete control over the business.

Disadvantages

• Unlimited liability — if the business owes money, your personal savings, and potentially your home, are at risk.
• Can be less tax-efficient at higher profit levels than a limited company.
• Harder to raise finance — you can’t sell shares, and some lenders and clients prefer dealing with companies.
• It’s all on you — there’s no separate entity to fall back on.

How to register as a sole trader

Registering is free and done online with HMRC. You need to register for Self Assessment as soon as you start trading, and at the latest by 5 October following the end of the tax year in which you began. You’ll then get a Unique Taxpayer Reference (UTR) and file a tax return each year.

You only need to register if you earned more than £1,000 from self-employment in the tax year. Below that, the trading allowance usually covers you and no return is needed.

A quick note on the £1,000 figure: it’s the gross income threshold, not profit. If your turnover is over £1,000 you should register, even if your profit after expenses is lower.

If you’d rather not deal with HMRC’s portal yourself, our Self Assessment service handles registration, your return and the filing — so it’s done right and on time.

How much tax does a sole trader pay?

There’s no separate “business tax” for sole traders. Your profit (income minus allowable expenses) is treated as your personal income and taxed through Self Assessment. For the 2025/26 tax year that means:

• Income Tax — nothing on the first £12,570 (your personal allowance), then 20% (basic rate) up to £50,270, 40% (higher rate) up to £125,140, and 45% (additional rate) above that.
• Class 4 National Insurance — charged on profits above £12,570, at 6% up to £50,270 and 2% on profits above that.
• Class 2 National Insurance — most sole traders no longer have to pay this since April 2024, though you can pay voluntarily to protect your State Pension record.

Tax rates and thresholds change every tax year, so treat these as a guide. For a quick personal estimate, use our free sole trader tax calculator.

What expenses can a sole trader claim?

You only pay tax on profit, so claiming every allowable business expense directly reduces your bill. Common allowable expenses include:

• Stock, materials and tools
• A proportion of home and phone bills if you work from home
• Business travel and mileage (or actual vehicle running costs)
• Software, subscriptions and professional fees
• Marketing, insurance and accountancy fees

Keeping clean records is what makes this painless — that’s exactly what good bookkeeping is for.

Do sole traders need to register for VAT?

Only once your taxable turnover passes the VAT registration threshold of £90,000 in any rolling 12-month period — then registration is compulsory. You can also register voluntarily below that if it suits your business (for example, to reclaim VAT on purchases). VAT applies the same way to sole traders as it does to companies.

Sole trader vs limited company: when should you switch?

This is the big question most growing sole traders face. A limited company is a separate legal entity, which means limited liability (your personal assets are protected) and often a lower overall tax bill once profits are higher — because you can take a mix of salary and dividends and pay Corporation Tax on profits rather than Income Tax.

The trade-off is more admin: annual accounts, a Corporation Tax return, a confirmation statement and payroll if you pay yourself a salary.

As a rough guide, many people start looking at incorporating once profits reach around £30,000–£50,000, but the right answer depends on your goals, not just a number. We’ll model both structures on your real figures — see our accountants for the self-employed if you want that done properly.

How an accountant helps a sole trader

You don’t need an accountant to be a sole trader — but a good one usually pays for themselves. We help sole traders:

• Register correctly and stay on top of every deadline
• Keep clean books and claim every expense they’re entitled to
• File an accurate Self Assessment return and never overpay
• Work out, with real numbers, when going limited is worth it

We do all of that for a fixed monthly fee, with a named accountant who actually knows your business.