A sole trader is a self-employed individual who runs their business as an individual rather than through a limited company. Sole traders pay Income Tax on business profits at rates of 20%, 40%, or 45%, plus Class 2 and Class 4 National Insurance contributions.
This guide covers how sole trader tax works, current tax rates, allowable expenses, and how to reduce your tax bill legally.
What is a Sole Trader?
A sole trader (also called a sole proprietor) is a self-employed person who owns and operates their business as an individual. There is no legal distinction between you and your business—you are personally liable for business debts.
Common sole trader businesses include:
- Freelancers and consultants
- Tradespeople (plumbers, electricians, builders)
- Photographers and designers
- Tutors and coaches
- Delivery drivers (Uber, Deliveroo, Amazon Flex)
- Online sellers (eBay, Etsy, Amazon)
Sole Trader vs Limited Company
| Aspect | Sole Trader | Limited Company | |--------|-------------|-----------------| | Legal status | You and business are one | Separate legal entity | | Liability | Personal liability | Limited to company assets | | Tax | Income Tax + NI | Corporation Tax + dividend tax | | Admin | Simple | More complex (accounts, filings) | | Privacy | Your name public | Company accounts public |
Most people start as sole traders due to simplicity. Consider incorporating if profits consistently exceed £40,000-50,000.
How Sole Trader Tax Works
As a sole trader, you pay tax on your business profit, not your total income:
Profit = Business Income − Allowable Expenses
You pay three types of tax:
- Income Tax on profits above the Personal Allowance
- Class 2 National Insurance (flat weekly rate)
- Class 4 National Insurance (percentage of profits)
Income Tax Rates 2025/26
| Band | Taxable Income | Tax Rate | |------|----------------|----------| | 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% |
Your Personal Allowance reduces by £1 for every £2 earned over £100,000, disappearing entirely at £125,140.
National Insurance Rates 2025/26
Class 2 National Insurance
- Rate: £3.45 per week (£179.40/year)
- Threshold: Profits over £6,725/year
- Purpose: Qualifies you for State Pension
Class 4 National Insurance
- 6% on profits between £12,570 and £50,270
- 2% on profits over £50,270
- Paid through Self Assessment
Tax Calculation Example
Sarah: Freelance Designer
| Item | Amount | |------|--------| | Business income | £45,000 | | Allowable expenses | £8,000 | | Taxable profit | £37,000 |
Income Tax:
- £0 – £12,570 at 0% = £0
- £12,571 – £37,000 at 20% = £4,886
National Insurance:
- Class 2: £179.40
- Class 4: 6% × (£37,000 − £12,570) = £1,465.80
Total Tax Bill: £6,531.20 Effective Tax Rate: 17.7%
Allowable Expenses for Sole Traders
Allowable expenses reduce your taxable profit. You can claim expenses that are "wholly and exclusively" for business purposes.
Office and Premises
- Business rent and rates
- Utilities (business premises)
- Office furniture and equipment
- Stationery and postage
- Phone and broadband (business proportion)
Working From Home
If you work from home, claim either:
Option 1: Simplified Expenses
| Hours worked from home/month | Flat rate/month | |------------------------------|-----------------| | 25–50 hours | £10 | | 51–100 hours | £18 | | 101+ hours | £26 |
Option 2: Actual Costs
Calculate the business proportion of:
- Mortgage interest or rent
- Council tax
- Electricity and gas
- Water rates
- Home insurance
Calculate proportion by room count, square footage, or time.
Travel and Transport
Mileage Allowance (using personal vehicle):
| Miles | Rate | |-------|------| | First 10,000 miles/year | 45p per mile | | Over 10,000 miles | 25p per mile |
This covers fuel, insurance, servicing, and depreciation—you cannot claim these separately.
Other travel costs:
- Public transport for business trips
- Parking and tolls
- Business trip accommodation
- Subsistence when travelling overnight
Not allowable: Commuting to a regular workplace.
Professional Services
- Accountant and bookkeeper fees
- Legal fees for business matters
- Consultant and contractor payments
- Professional body memberships (e.g., RICS, CIMA)
- Industry subscriptions and journals
Marketing and Sales
- Website hosting and domains
- Advertising (Google, Facebook, print)
- Business cards and brochures
- Trade show costs
- PR and marketing services
Equipment and Tools
- Computers, laptops, tablets
- Software subscriptions
- Tools of your trade
- Office furniture
For expensive items, claim via Capital Allowances (see below).
Financial Costs
- Business bank charges
- Interest on business loans
- Credit/debit card fees
- Business insurance
Insurance
- Public liability insurance
- Professional indemnity insurance
- Employer's liability (if you have staff)
- Business equipment insurance
Capital Allowances
Capital allowances let you deduct the cost of business assets (equipment, vehicles, machinery) from your profits.
Annual Investment Allowance (AIA)
The AIA allows you to deduct 100% of qualifying expenditure up to £1 million per year.
Qualifying items:
- Computers and office equipment
- Machinery and tools
- Vans and commercial vehicles
- Office furniture
Cars
Cars have separate rules based on CO2 emissions:
| CO2 Emissions | Allowance | |---------------|-----------| | 0g/km (electric) | 100% first-year allowance | | 1-50g/km | 18% writing down allowance | | Over 50g/km | 6% writing down allowance |
Only the business-use proportion is allowable.
Reducing Your Tax Bill
1. Claim All Legitimate Expenses
Many sole traders under-claim. Review your bank statements for:
- Software subscriptions
- Phone bills (business proportion)
- Home office costs
- Professional development
- Travel and mileage
2. Pension Contributions
Contributions to a personal pension:
- Reduce your taxable income
- Receive 20% tax relief automatically (added to your pension)
- Higher rate taxpayers claim additional 20% through Self Assessment
Example: You contribute £4,000, pension receives £5,000 (after 20% basic rate relief). If you're a higher rate taxpayer, claim £1,000 on your tax return.
3. Use Your Personal Allowance
If your spouse doesn't use their full Personal Allowance:
- Pay them a salary for legitimate work they do
- Split property income (if you're landlords together)
4. Time Your Income and Expenses
If you're near a tax threshold:
- Delay invoicing to push income to the next tax year
- Bring forward expenses to claim this year
- Make pension contributions before year-end
5. Capital Allowances
Buy qualifying equipment before your year-end to reduce this year's profit. The AIA gives 100% relief in year one.
How to Register as a Sole Trader
You must register for Self Assessment by 5 October following the tax year you started trading.
Registration Steps
- Go to gov.uk/register-for-self-assessment
- Create a Government Gateway account (if you don't have one)
- Select "Self-employed or sole trader"
- Provide your personal details and business information
- HMRC posts your Unique Taxpayer Reference (UTR) within 10 working days
Your UTR is a 10-digit number required for filing tax returns.
Record-Keeping Requirements
From day one, keep records of:
- All sales and business income
- All business expenses with receipts
- Bank statements
- Invoices (sent and received)
- Mileage logs
Records must be kept for 6 years after the tax year they relate to.
Sole Trader Tax Deadlines
| Deadline | Action | |----------|--------| | 5 October | Register for Self Assessment (new traders) | | 31 October | Paper tax return deadline | | 31 January | Online tax return deadline | | 31 January | Pay tax owed + first payment on account | | 31 July | Second payment on account |
Payments on Account
If your tax bill exceeds £1,000 (and less than 80% was collected through PAYE), you make advance payments:
- 31 January: 50% of previous year's bill
- 31 July: 50% of previous year's bill
Adjust if you expect to earn less.
Making Tax Digital for Sole Traders
From April 2026 (income over £50,000) or April 2027 (over £30,000), sole traders must comply with Making Tax Digital:
- Keep digital records using HMRC-recognised software
- Submit quarterly updates to HMRC
- File a final declaration by 31 January
TaxFolio is HMRC-recognised for MTD and makes the transition seamless.
When to Consider Incorporating
A limited company may be more tax-efficient if:
- Profits consistently exceed £40,000-50,000
- You want to retain profits in the business
- You need limited liability protection
- You're bringing in investors or partners
Reasons to stay as a sole trader:
- Lower profits
- Preference for simplicity
- Need flexible access to all profits
- Privacy concerns (company accounts are public)
Consult an accountant before incorporating—the decision depends on your specific circumstances.
Common Sole Trader Mistakes
- Mixing personal and business finances — use a separate bank account
- Not tracking cash expenses — keep all receipts
- Missing registration deadline — register by 5 October
- Forgetting to save for tax — set aside 25-30% of profits
- Under-claiming expenses — review thoroughly
- Missing payment deadlines — set calendar reminders
- Not keeping records for 6 years — HMRC can enquire
Manage Sole Trader Tax with TaxFolio
TaxFolio is built for UK sole traders and freelancers:
- Bank connection imports transactions automatically via Open Banking
- AI categorisation sorts expenses into correct tax categories
- Real-time tax calculations show your liability as you earn
- Direct HMRC submission files your SA100 and SA103 in one click
- MTD-ready for the April 2026 transition
- From £69.99/year with no monthly fees
Start your free 30-day trial and take control of your sole trader tax.