What is a sole trader?
A sole trader is a self-employed person who owns and runs a business as an individual, keeps all the profits and is personally responsible for its debts.
What a sole trader means
Being a sole trader is the simplest way to run a business in the UK. There is no company to set up and nothing to file at Companies House. You and the business are legally the same person: you keep everything it earns after tax, and you are personally liable for what it owes.
You must register for Self Assessment with HMRC by 5 October after the end of the tax year in which you started. You can trade under your own name or a business name, as long as the name does not imply you are a company.
Example: tax on £45,000 profit in 2026/27
| Item | Amount |
|---|---|
| Profit | £45,000 |
| Income tax: 20% of (£45,000 − £12,570) | £6,486 |
| Class 4 NI: 6% of (£45,000 − £12,570) | £1,945.80 |
| Total tax and NI | £8,431.80 |
| Take-home | £36,568.20 |
Tax is worked out on profit, not on drawings: what you take out of the business is irrelevant to the bill.
Why it matters for your business
The main advantages are simplicity and privacy. Your accounts are not public, admin costs are low, and you can use the cash basis for bookkeeping. Profits under the £1,000 trading allowance need not be declared at all.
The drawbacks are unlimited liability and tax once profits rise. Every pound of profit above the higher rate threshold is taxed at 40% plus 2% NI, whether you need the money or not. A limited company used to save tax at fairly modest profits. With employer NI at 15% and higher dividend rates, paying all the profit out of a company in 2026/27 often leaves you with about the same or less than staying self-employed. The saving now comes mainly from keeping profit in the company, making pension contributions through it, or at higher profit levels, so it needs modelling on your own numbers.
Making Tax Digital
From April 2026, sole traders and landlords with qualifying income over £50,000 must keep digital records and send quarterly updates to HMRC. The threshold falls to £30,000 in April 2027 and £20,000 in April 2028. Read our MTD for Income Tax guide for what that involves.
Cloudkeepers looks after sole traders' tax returns and can model when a limited company would save you money.
Common questions
Yes, Class 4 National Insurance at 6% on profits between £12,570 and £50,270 and 2% above. Class 2 is no longer compulsory: anyone with profits over the small profits threshold is treated as having paid it, which protects their State Pension.
There is no single profit figure any more. If you need to draw all your profit, a company often saves little or nothing in 2026/27. It pays off when you can leave profit in the company, want employer pension contributions or limited liability. Model your own figures before switching.
Yes. You register as an employer, run PAYE and auto-enrolment, and are personally responsible for wages and employment obligations like any employer. That includes registering with HMRC before the first payday, deducting tax and National Insurance, and enrolling eligible staff into a workplace pension.