What is a Sole Trader? The Complete UK Guide for 2026

If you've ever researched going into business for yourself and becoming self-employed, you may have come across the term “sole trader.” You might ask yourself what does this mean and how can it affect me? 

In short, a sole trader is a self-employed person who is the sole owner of their business. As a term, it can be used interchangeably with sole proprietorship and generally refers to the structure of a business. If you chose to register as a sole trader, you and your company would become one legal entity in the eyes of the law and you would be entitled to all your profits after tax. 

Thanks to the relative ease with which one can become a sole trader, it has become a very popular option for self-employed people. There are an estimated 4.1 million sole traders running a business in the United Kingdom and if you’re planning to open a small business it might be the right option for you.

What is a sole trader business?

A sole trader, also known as a sole proprietor or sole proprietorship, is a straightforward business structure where one individual operates and owns the entire business. It's one of the simplest ways to start a business because it doesn't require formal incorporation. In this setup, the sole trader has complete control over how the business operates and retains full autonomy in developing the business's identity and brand.

Usually, the sole trader is the sole worker in the business they've established. However, they can hire employees, in which case they need to register as employers and set up a PAYE (Pay As You Earn) system for managing payroll and taxes.

But before we go any further, let's look at sole trader advantages and disadvantages.

Advantages of a sole trader

As a small business owner, these are the advantages of being a sole trader:

For many, the freedom to work for yourself is the biggest benefit. Sole traders have complete control of their company. This means they’re free to run it exactly how they want and make decisions as they see fit. 

Depending on the industry, sole traders have little to no start-up costs. This, combined with the fact that there are very few annual accounting costs, means that you’ll be able to keep a much firmer grip on your overheads. This financial freedom extends to your profits where you alone get to keep everything after tax. 

Sole trader advantages extend as far as financial privacy, too. Unlike a limited company, where anyone can access their information on the government’s Companies House website, sole traders are able to keep their finances strictly private. No member of the public is able to see a self-employed person's finances unless they choose to share them themselves.

Drawbacks of sole trading

While there are undeniable advantages to becoming a sole trader, there are several downsides. As long as your business keeps running smoothly, you should be able to avoid any of these adverse effects. 

Unlimited liability refers to the fact that as a sole trader, you are personally liable for any and all of your business’ debts and losses. For sole traders, there are no distinctions between personal and business assets. If worse comes to worst and you suffer a big financial hit, debtors could come for assets such as your house, car, or anything else in your name.

Due to unlimited liability, some sole traders may have difficulty getting access to finance. The private nature of your finances and the inherent risk of being self-employed means that lenders may be reluctant to offer as much as they would to a limited company. In turn, this can contribute to credibility issues where your company is perceived as less prestigious than a limited company. Some traders try to get over this problem by emulating the practices of successful businesses.

Being legally one and the same as your company can sometimes lead to complications when you try to sell it or transfer ownership to someone else when you retire. The process of separating personal and business assets means that some people choose to transfer their business to a limited company. As a limited company is owned by its shareholders, the personal and business assets of the CEO are separate making the transfer of ownership much easier.

Sole trader vs Limited company: what's the right choice for you?

Examples of sole traders

Lots of small shops and businesses are set up as sole proprietorships. Here are some common examples:

• Tradespeople: These are folks like builders, gardeners, landscapers, carpenters, and handymen. 
• Freelancers: People who work independently in digital and creative fields (freelancers) often operate as sole traders. This includes jobs like graphic designers, web developers, writers, marketers, and social media experts.
• Gig economy workers: These are the ones who work flexible gigs, sometimes alongside another job. Think taxi drivers, couriers, delivery folks, and tutors.

How to set up as a sole trader

Now that you've got a good understanding of what a sole trader is, let's talk about setting up as a sole trader. Here are some simple steps:

Choose a business name

As the sole proprietor of your business, it’s up to you to come up with a suitable name for your company. Choosing a business name is an important step in legitimising yourself as a sole trader, so you must make sure to do it properly.

Your business name can be almost anything you want. Some sole traders choose to keep it simple and use their own name, some go for something professional-sounding, and some even choose to make their name a catchy phrase or a witty joke. Whatever name you choose, make sure it’s a good representation of who you are as a self-employed person and what your company does.

There are a few guidelines that you must follow when naming your business: 

• Names that are rude or offensive will not be accepted 
• Sole trader business names can’t include the words limited, Ltd, Limited Liability Partnership, LLP, public limited company, and plc - these terms could give the impression your company is incorporated
• Names can’t use registered trademarks - this opens you up to legal action from the owner of the copyright. You can check registered trademarks on the Gov website.

If you’re unsure about whether or not your name would be in breach of any of these guidelines, it’s safer to err on the side of caution and choose a different name.

Register for self assessment

To register as a sole trader, you absolutely must register for Self Assessment. You'll need to register if:

• you earn more than £1,000 in a tax year (from 6 April to 5 April)
• you need to prove you’re self-employed (for example if you need to claim Tax-Free Childcare)
• you want to make voluntary Class 2 National Insurance payments to help you qualify for benefits and State Pension

If you register late, or if you don't register at all, you'll likely have to pay a penalty.

Becoming a VAT-register sole trader 

Depending on your business and how much you earn, you might want to think about registering for VAT (Value Added Tax). You'll need to do this if:

• Your total VAT taxable turnover over the last 12 months exceeded £90,000. You also need to register if you expect your turnover to surpass £90,000 in the next 30 days.
• You're based outside the UK but supply goods or services to the UK (or plan to within the next 30 days), you must register for VAT.

NOTE: Even if your turnover is under £90,000, you can choose to register for VAT voluntarily. This might be beneficial if you want to reclaim VAT on business expenses.

If everything you sell is exempt from VAT, registration is not required, but you won't be able to reclaim VAT on your business expenses.

Once registered, you must pay any VAT you owe to HM Revenue and Customs (HMRC) from the date of registration.

Sort out your National Insurance Contributions

As a sole trader, you'll need to pay National Insurance Contributions (NICs) on your profits. It's like paying into your pension and benefits fund. Class 2 NICs are no longer compulsory, though you can choose to pay them to protect your state pension and benefits, and is collected annually where relevant. Class 4 NICs are based on your profits and are calculated when you do your Self Assessment tax return.

You can usually set up a direct debit to pay your NICs automatically. Make sure to keep up with these payments to stay on track with your benefits and pension contributions.

Set up a business bank account

It's smart to keep your personal and business finances separate. Opening a business bank account makes it easier to track your income and expenses. Plus, it shows you're serious about your business.

Most banks offer business accounts with features like free transactions, accounting software integration, and sometimes even perks like discounts on business services. To get started, bring your ID, proof of address, and business registration documents.

Working as a sole trader and tax responsibilities

Sole traders don't pay corporation tax. Instead, they pay the following:

Pay income tax

As a sole trader, you've got to pay income tax on the money you make. It's calculated after you deduct your business expenses from your earnings. You'll pay 20% on profits between £12,571 and £50,270, 40% between £50,271 and £125,140, and 45% above that. Everyone gets a tax-free personal allowance of £12,570, too, though this starts to shrink once your income goes over £100,000. Every year, you need to tell HMRC how much you've earned and what you've spent to figure out how much tax you owe.

National Insurance (NI) contributions

You'll also chip in for National Insurance. These contributions go towards things like your state pension and other benefits. As a sole trader, you'll pay Class 4 NICs at 6% on profits between £12,570 and £50,270, dropping to 2% above that. Class 2 NICs are no longer compulsory, though you can still pay them voluntarily to protect your State Pension record.

Self assessment tax return

This is where you lay it all out for HMRC. You fill out a Self Assessment tax return each year, or, if you're within scope of Making Tax Digital, quarterly updates plus a final declaration instead. It's how you report your income, claim any tax deductions, and make sure you're paying the right amount of tax and NI contributions. It's super important to get this done on time to avoid any fines.

Business insurance

To keep yourself covered, think about getting business insurance. It can protect you if something goes wrong, like if a client claims against you or there's an accident at work. It's a good idea to check out different types of insurance, depending on what your business does.

Making Tax Digital (MTD) for sole traders

As of 6 April 2026, sole traders with qualifying income over £50,000 (based on your 2024/25 tax return) must keep digital records and submit quarterly updates to HMRC, replacing the old annual Self Assessment return. This threshold drops to £30,000 from 6 April 2027 (based on 2025/26 income), and to £20,000 from 6 April 2028 (based on 2026/27 income). Limited companies aren't yet in scope, but should still prepare, as this is expected to become mandatory for all in time.

MTD requires qualifying businesses to use HMRC-recognised software, like Xero, QuickBooks, or Sage, to keep digital records of income and expenses. You'll also need to file each quarterly submission directly to HMRC.

Practical steps:

• Digital records. Log every sale and expense digitally, meaning no more shoebox receipts or spreadsheets alone.
• Quarterly submissions. Provide HMRC with four updates a year. These will summarise income and expenses, plus a final declaration replacing your annual return.
• Point-of-sale integration. If you run a shop, café, or any business taking in-person payments, your POS system's daily sales data can feed straight into MTD-compatible software, removing the need for manual entry and making MTD sweat-free.

Epos Now's Xero, Sage, and QuickBooks integrations put you ahead of MTD deadlines with minimal extra admin! Plus, if you need advice on MTD requirements, you can get it from the government here!

Sole trader expenses

Claiming allowable expenses reduces your taxable profit, so it's worth knowing what you can deduct.

• Office costs. Stationery, phone bills, and broadband used for business can all be claimed, even if you work from home and only use them partly for the business.
• Travel and mileage. Business journeys, whether by car, public transport, or mileage on your own vehicle, are deductible (excluding ordinary commuting).
• Marketing and advertising. Website costs, social media ads, and printed materials all count.
• Professional subscriptions and training. Trade body memberships and courses that maintain or improve your existing skills are allowable.
• Equipment and tools. Anything needed to do the job, from laptops to trade tools, can usually be claimed.
• Stock and materials. Goods bought to sell or use in your work are a straightforward deductible cost.
• Accountancy fees. Fees for bookkeeping, tax returns, or general business advice are allowable too.

For vehicles and working from home, you can choose between HMRC's simplified expenses flat rates or calculating your actual costs; check current rates on GOV.UK before deciding which works out best.

Make being a sole trader easier 

Becoming a sole trader is a decision that shouldn’t be taken lightly. If you do decide to go down the self-employed route, it’s important to make sure you have the tools you need to run your business the way you want to. 

Running a business on your own means every tool needs to earn its place. Epos Now's cloud-based POS system gives sole traders a complete, real-time view of their sales, stock, and finances in one place, without the overhead of a full accounts team. Using an innovative cloud-based system, you’ll be able to control all the vital aspects of your business from one easy-to-use point of sale system.

Our systems can integrate with thousands of popular apps to make the process even simpler, such as key accounting integrations like Xero and Quickbooks.