Sole trader
A sole trader is an individual running a business in their own name, with no separate legal entity. Profits are taxed through self assessment at income tax rates plus Class 4 National Insurance, and the owner is personally liable for business debts.
Also known as: self-employed
How it works
There is no separation between you and the business. You keep the profits, you owe the debts, and tax is charged on profit whether or not you withdraw it. Income tax applies at 20%, 40% and 45% after the £12,570 personal allowance, with Class 4 National Insurance at 6% and 2% on top.
Setting up is immediate: register with HMRC for self assessment, keep records, and file a return each 31 January. There are no accounts to file publicly, no confirmation statement, no corporation tax return. That simplicity is the real advantage at modest profit levels, and the £1,000 trading allowance means very small side income may not need reporting at all.
The comparison with a limited company turns on how much profit you need to draw. A sole trader is taxed on all profit; a company director is taxed personally only on what comes out, with retained profit taxed at corporation tax rates of 19% to 25%. Once profits comfortably exceed personal needs, incorporation usually wins, before counting credibility and liability.
Switching later is straightforward but not free: assets transfer, goodwill may need valuing, and VAT registration, contracts and bank accounts all have to move.
Who this affects
- New businesses testing an idea before committing to a company
- Side businesses under the £1,000 trading allowance
- Sole traders whose profit now exceeds what they draw personally
- Anyone exposed to commercial risk who would benefit from limited liability
Common mistakes
- Assuming tax is only due on money withdrawn from the business
- Ignoring Class 4 National Insurance when budgeting for January
- Incorporating without planning the transfer of assets and goodwill
Frequently asked questions
How is a sole trader taxed?
On business profits through self assessment at income tax rates, plus Class 4 National Insurance at 6% and 2%.
When should I switch to a limited company?
Usually when profits consistently exceed what you need to draw, or when clients, liability or investment plans require a company.
Do sole traders file accounts publicly?
No. There is no Companies House filing, only the self assessment return and the records supporting it.
Am I personally liable for business debts?
Yes. There is no separate legal entity, so business debts are your debts.
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Reviewed by Waqas Sagar ACA FCCA FMAAT · Last reviewed 13 September 2026 · Figures for 2026/27 · About our practice
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