Sole Trader Tax Guide for the Self-Employed
Updated: Oct 5
Working for yourself is the easy part. Working out what you owe HMRC, when it's due, and how much to put aside is where most people come unstuck - usually because nobody ever explained the system to them in plain English.
This guide does that. It covers what you're actually taxed on, the two separate taxes you pay, what you can claim, when the money is due, and the changes coming down the track. It's the hub of our sole trader series of simple explainers, so where a topic deserves a deeper dive, we'll point you to a dedicated guide.
📋 Table of Contents
📝 Do You Need to Register as a Sole Trader?
If your gross self-employed income is more than £1,000 in a tax year, you need to register for Self-Assessment and declare it. That £1,000 is the trading allowance, and it applies to your income before expenses, not your profit.
The deadline is 5 October following the end of the tax year in which you started. So if you began trading in July 2026 (the 2026/27 tax year), you must register by 5 October 2027. Registration isn't instant - HMRC issues you a Unique Taxpayer Reference (UTR), and you can't file without one.
Below £1,000 you have nothing to report, which is why the trading allowance is sometimes called the side-hustle allowance. Worth knowing: the government has announced plans to raise the reporting threshold for trading income to £3,000 gross during this Parliament. It isn't live yet, so £1,000 still applies.
Our Essential Guide to Self-Assessment walks through the registration and filing process step by step.
💷 What You're Actually Taxed On
This is the single most important thing to understand, and the thing most new sole traders get wrong:
You are taxed on your profit, not on what you invoice.
Profit is your turnover minus your allowable business expenses. If you bill £50,000 and have £12,000 of legitimate costs, you're taxed on £38,000 - not £50,000. Every expense you claim correctly reduces your bill.
You also have a personal allowance of £12,570, which is the slice of income you can earn before any income tax is due at all.
🧾 The Two Taxes You Pay
Sole traders pay two separate things on their profit, and they're collected together through Self-Assessment:
1. Income Tax (after your £12,570 personal allowance):
20% on profit between £12,571 and £50,270
40% between £50,271 and £125,140
45% above £125,140
2. Class 4 National Insurance:
6% on profit between £12,570 and £50,270
2% on profit above £50,270
A change worth knowing about: Class 2 National Insurance is no longer compulsory. Since April 2024, sole traders with profits above the small profits threshold - £7,105 for 2026/27, up from £6,845 in 2025/26 - are treated as having paid it, so you still build a qualifying year towards your State Pension without a bill. If your profits fall below that threshold, you can pay voluntary Class 2 at £3.65 a week to protect your record - which is usually worth doing.
There's a quirk here worth spotting: a sole trader with profit between £7,105 and £12,570 pays no National Insurance and no income tax at all, yet still banks a qualifying year towards the State Pension.
All of these thresholds are frozen, which means that as your profits rise with inflation, more of them fall into the taxable bands over time.
🧮 Worked Example: Jamie's First Full Year
Jamie is a self-employed electrician. In 2026/27 he invoices £52,000 and has £11,000 of allowable expenses (tools, van costs, insurance, materials, accountancy fees).
Taxable profit: £52,000 - £11,000 = £41,000
Income tax: 20% on (£41,000 - £12,570) = £5,686
Class 4 NI: 6% on (£41,000 - £12,570) = £1,705.80
Total due: £7,391.80
That's roughly 18% of his profit, or about 14% of what he invoiced. Note how the £11,000 of expenses saved him around £2,964 - which is exactly why sloppy record keeping is expensive.
In his first year Jamie will also face payments on account on top of this, which catches almost everyone out. More on that below.
🧰 Allowable Expenses
An expense is allowable if it's incurred wholly and exclusively for the business. Common ones include:
Stock, materials and tools
Business travel and mileage at 55p a mile for the first 10,000 miles, then 25p (the 55p rate applies from April 2026, up from 45p)
A proportion of your home costs if you work from home
Phone and internet (business share)
Business insurance and professional subscriptions
Accountancy and legal fees
Advertising and website costs
Training that maintains your existing skills
Where something has mixed personal and business use, you claim only the business share, and you should be able to show how you worked it out. We go through every claimable cost, and the ones people miss, in our guide to what expenses sole traders can claim.
🏦 How Much Should You Set Aside?
As a rough rule, putting aside 25-30% of your profit covers income tax and Class 4 NI for most sole traders in the basic-rate band, with headroom for payments on account. Once you're into the higher-rate band, you'll want closer to 40-45%.
The practical version: open a separate savings account, and move a percentage across every time you're paid rather than trying to find the money in January. Our guide to how much tax to set aside breaks it down by income level with a simple method you can actually stick to.
📅 When the Money Is Due
31 January - file your online return and pay the balance for the tax year that ended the previous April
31 July - second payment on account
Payments on account are the part nobody warns you about. If your tax bill is over £1,000, HMRC asks you to pay towards next year's bill in two instalments. In your first year that means paying your whole bill plus half of it again on the same day in January, which is a genuinely nasty surprise if you haven't planned for it. Our explainer on payments on account covers how they work and why they exist.
Miss these dates and penalties start at £100 automatically, even if you owe nothing. The full picture is in our guide to Self-Assessment deadlines and late penalties.
📊 VAT: The £90,000 Question
You must register for VAT once your taxable turnover exceeds £90,000 in any rolling 12-month period, or if you expect to exceed it in the next 30 days alone.
Two things trip people up. First, it's a rolling 12 months, not your tax year or accounting year - so you need to check the running total regularly rather than once a year. Second, it's turnover, not profit.
If you cross it, you must notify HMRC within 30 days of the end of that month, and registration takes effect from the first day of the second month after you went over. You can also register voluntarily below the threshold, which sometimes makes sense if your customers are VAT-registered businesses and you have significant input VAT to reclaim. Our guide to VAT explained for sole traders covers the schemes and the decision.
💻 Making Tax Digital for Income Tax
This is the biggest change to how sole traders report in a generation, and it's already underway.
From April 2026, sole traders with qualifying income over £50,000 must keep digital records and send HMRC quarterly updates instead of one annual return, followed by a Final Declaration. The threshold drops to £30,000 in April 2027 and £20,000 in April 2028.
Qualifying income is your combined gross self-employment and property income, before expenses - so if you also let a property, the two are added together. Our MTD for ITSA guide includes a decision tree to check whether and when it applies to you.
🏢 Sole Trader or Limited Company?
Sole trading is simpler: less admin, no Companies House filings, and your accounts stay private. The trade-offs are that you have unlimited liability for business debts, and above a certain profit level a limited company can be more tax-efficient, because profits are taxed through Corporation Tax and you can choose how to extract them.
There's no universal crossover point - it depends on your profit, how much you need to draw, your attitude to admin, and whether clients expect a company. It's worth modelling properly rather than following a rule of thumb. If you're leaning that way, our upcoming guide to setting up a limited company will explain the process.
📁 Keeping Records
You must keep records supporting everything on your return for at least five years after the 31 January filing deadline. For 2026/27, that means until 31 January 2033.
In practice: sales invoices, receipts for every expense, bank statements, your mileage log, and your home-working calculation. Bank statements alone aren't enough - HMRC wants evidence of what the money was for.
If MTD applies to you, those records must be digital, so good bookkeeping software stops being optional.
⚠️ Common Mistakes to Avoid
Thinking you're taxed on turnover. You're taxed on profit. Expenses come off first.
Forgetting Class 4 National Insurance. People budget for income tax and get caught by the extra 6%.
Not planning for payments on account. The first January bill is often 150% of what you expected.
Mixing personal and business banking. It makes record keeping painful and claims harder to defend.
Missing the VAT threshold. It's a rolling 12 months, so it can creep up mid-year without you noticing.
Leaving registration too late. No UTR means no filing, and the deadline is 5 October.
💬 Frequently Asked Questions
How much tax does a sole trader pay? Income tax at 20%, 40% or 45% on profit above the £12,570 personal allowance, plus Class 4 National Insurance at 6% between £12,570 and £50,270 and 2% above. On £41,000 of profit that's roughly £7,400 in total.
Do I still pay Class 2 National Insurance? Not as a compulsory charge. Since April 2024 it's treated as paid if your profits are above the small profits threshold - £7,105 for 2026/27 - so you still get your State Pension credit. Below that, you can pay it voluntarily at £3.65 a week.
Can I claim expenses from before I started trading? Generally yes - pre-trading costs incurred wholly for the business in the seven years before you start can usually be treated as incurred on your first day of trading.
Do I need a business bank account? Not legally as a sole trader, but it makes record keeping far simpler and is strongly recommended.
What if I'm employed and self-employed at the same time? Both are fine. Your employment income is taxed through PAYE and your self-employed profit through Self-Assessment, but they're added together to work out which tax band your profit falls into.
When should I think about a limited company? Usually when profits consistently exceed what you need to draw personally, or when liability protection matters. It's worth running the numbers rather than guessing.
💡 Key Takeaways
You're taxed on profit, not turnover - allowable expenses come off first.
Two taxes apply: income tax (20/40/45%) and Class 4 NI (6% then 2%). Class 2 is no longer compulsory above the £7,105 small profits threshold.
Set aside 25-30% of profit in the basic-rate band, more once you're a higher-rate taxpayer.
Payments on account mean your first January bill is often much bigger than expected.
Register for VAT once rolling 12-month turnover passes £90,000.
MTD for ITSA applies from April 2026 above £50,000, falling to £30,000 and then £20,000.
Keep records for five years after the filing deadline, digitally if MTD applies.
📞 Want Someone to Take This Off Your Hands?
At ASBA Accounting, we look after sole traders and small businesses across Crawley and West Sussex - from your tax return and expense claims to VAT registration, getting you ready for Making Tax Digital, and advising on whether a limited company would suit you better.
👉 Get in touch today or call us on 01293 525656 for friendly, straightforward advice.
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