Key takeaways
- The main advantage of being a sole trader is simplicity: you can start trading without registering, and only need to register for Self Assessment once you earn over £1,000 in a tax year.
- The main disadvantage is unlimited liability: GOV.UK says sole traders are personally responsible for all of the business's debts.
- In 2026/27 sole traders pay Class 4 National Insurance of 6% on profits between £12,570 and £50,270 and 2% above that.
- Class 2 National Insurance is treated as paid if profits are at least £7,105; below that you can pay voluntary Class 2 at £3.65 a week.
- A sole trader with qualifying income over £30,000 in 2025/26 must use Making Tax Digital for Income Tax from 6 April 2027.
- On £40,000 of profit in 2026/27, a sole trader in England pays about £7,132 in income tax and Class 4 National Insurance.
- Limited companies pay Corporation Tax at 19% on profits up to £50,000 and 25% above £250,000, which is why higher earners often compare structures.
Being a sole trader is the simplest and cheapest way to run a business in the UK: you can start straight away, keep your affairs private and take all the profit. The trade-off is that you and the business are legally the same person, so you carry unlimited liability for its debts and pay income tax and National Insurance on every pound of profit. It suits most people starting small; it suits fewer people as profits grow.
What are the advantages of being a sole trader?
The main advantages are low cost, low admin and full control. Here they are in brief.
- Quick to start. GOV.UK says you can start trading without registering. You must register for Self Assessment once you earn over £1,000 in a tax year (6 April to 5 April).
- No Companies House filings. There are no public accounts, no confirmation statement and no register of directors. Your figures stay between you and HMRC.
- Simple tax. You report profit on one Self Assessment return a year. The £1,000 trading allowance can cover very small side incomes.
- Your money is your money. You can take drawings whenever you like, with no dividend paperwork or director’s loan account. See sole trader drawings.
- Low running costs and easy exit. Accountancy fees are usually lower than for a company, and there is no company to close if you stop.
What are the disadvantages of being a sole trader?
The main disadvantages are personal liability and a tax bill that rises steeply with profit. The others follow from that.
- Unlimited liability. GOV.UK states that sole traders are “personally responsible for all of the debts”. Your home and savings can be at risk if the business fails. Insurance helps but does not remove the risk.
- Tax on all profit. You pay income tax and Class 4 National Insurance on profit whether you take it out or leave it in the business.
- Less flexibility on tax. A company owner can choose a mix of salary, dividends and pension contributions. A sole trader cannot split income the same way.
- Perception and investment. Some clients and agencies require a limited company, and you cannot issue shares to investors.
- Making Tax Digital. Above the income thresholds you must keep digital records and send quarterly updates to HMRC.
How much tax does a sole trader pay in 2026/27?
A sole trader pays income tax at the normal rates plus Class 4 National Insurance on profits. These are the 2026/27 National Insurance rates.
| Item | Threshold | Rate |
|---|---|---|
| Class 4 NI | Profits £12,570 to £50,270 | 6% |
| Class 4 NI | Profits over £50,270 | 2% |
| Class 2 NI | Profits £7,105 or more | Treated as paid, nothing due |
| Voluntary Class 2 | Profits under £7,105 | £3.65 a week |
Worked example for England, Wales or Northern Ireland, with £40,000 profit and the standard £12,570 Personal Allowance:
- Taxable income is £40,000 minus £12,570, which is £27,430.
- Income tax at 20% is £5,486.
- Class 4 National Insurance at 6% on £27,430 is £1,645.80.
- The total is about £7,132, or roughly 18% of profit.
Scottish income tax bands differ, so the figure will change in Scotland. Our self-employed take-home calculator runs the sums for any profit.
When do Making Tax Digital rules apply?
Making Tax Digital for Income Tax applies to sole traders and landlords whose qualifying income passes a threshold. HMRC’s eligibility guidance sets these dates.
| Qualifying income | In tax year | Start by |
|---|---|---|
| Over £50,000 | 2024/25 | 6 April 2026 |
| Over £30,000 | 2025/26 | 6 April 2027 |
| Over £20,000 | 2026/27 | 6 April 2028 |
Qualifying income is turnover from self-employment and property before expenses, not profit.
How does a sole trader compare with a limited company?
A limited company protects your personal assets and can be more tax efficient at higher profits, but it costs more to run. Companies pay Corporation Tax at 19% on profits of £50,000 or less and 25% above £250,000, with marginal relief in between. Dividends are then taxed at 10.75%, 35.75% or 39.35% above a £500 allowance in 2026/27.
| Point | Sole trader | Limited company |
|---|---|---|
| Liability | Unlimited | Limited to share capital, in most cases |
| Public filings | None | Accounts and confirmation statement |
| Tax on profit | Income tax and Class 4 NI | Corporation Tax, then tax on what you draw |
| Admin | Light | Heavier, with payroll and dividends |
Our full guide to sole trader vs limited company works through the numbers.
Which applies to you?
Use this quick decision list as a starting point, then take advice on your own figures.
- If you are testing an idea or earning under about £30,000, a sole trader is usually simpler and cheaper.
- If your work carries a real risk of large claims or debts, limited liability may matter more than tax.
- If profits are well above the higher rate threshold and you can leave money in the business, a company often saves tax.
- If a client or agency insists on a company, the choice may be made for you. Check IR35 before you contract.
What to do now
- Register for Self Assessment once you pass £1,000 of trading income. Our guide on how to register as a sole trader has the steps.
- Open a separate bank account so your records stay clean.
- Set aside tax from every payment.
- Check your MTD start date against your turnover.
- Review your structure each year as profits change.
Frequently asked questions
Is being a sole trader better than a limited company?
Neither is better for everyone. A sole trader is simpler and cheaper to run; a limited company offers limited liability and can save tax at higher profits.
Do sole traders have unlimited liability?
Yes. GOV.UK says sole traders are personally responsible for all of the business’s debts, so personal assets can be at risk.
How much can a sole trader earn before paying tax?
Most people pay no income tax or Class 4 National Insurance on the first £12,570 of profit in 2026/27, because of the Personal Allowance and the Class 4 threshold.
Do sole traders pay Class 2 National Insurance?
Not in practice. Class 2 is treated as paid if profits are £7,105 or more; below that you can choose to pay £3.65 a week to protect your State Pension record.
Can a sole trader employ staff?
Yes. A sole trader can employ people, but must register as an employer with HMRC, run payroll and meet auto-enrolment pension duties.
Sources
Rates, thresholds and rules in this guide were checked against HMRC and GOV.UK guidance on 6 November 2026. Tax rules change, so check the current position on GOV.UK or with a qualified adviser before acting. This guide is general information, not personal advice.