What Sole Traders need to know about tax

If you are about to start your business or are currently running a small business, it is important that you understand your tax obligations and when you need to pay them.

There are factors to consider, including how the business is set up and whether you have any employees working for your company.

Businesses in the UK are taxed on profits they make and how this is done is dependent on whether you are a sole trader or own a limited company.

Sole traders need to ensure they have followed the regulations in place and have implemented procedures into their operations.

What must I do once I create my business?

To fulfil your tax obligations, as a sole trader, you will need to register as self-employed, which will ensure that your national insurance record is credited (towards your pension) and HMRC will put you into the self-assessment tax system.

This registration process will ask for various details about your business and the work you are planning to complete. Once complete, you will receive a letter from HM Revenue and Customs (HMRC) containing your Unique Taxpayer Reference (UTR) number.

What tax do sole traders need to pay?

As a sole trader, you are personally responsible for paying your company’s debt and taxes.  (Unlike for a limited company)

You will need to pay Income Tax based on the profits your company makes once you surpass the personal tax allowance, which is currently £12,750.

In addition to this, if your company earns over £90,000 across a 12-month period, you must register for Value Added Tax (VAT).

It is a legal obligation to keep business records

Even if your business is just starting, and the amounts are small – you have to keep records:

Keep records sufficient to stand up to HMRC investigations to show:

• What your income earned was in the tax year
• Who paid you for the work
• What expenses you incurred
• What Equipment etc you bought
• Who owed you money at the year-end
• What work you had done but not billed for at the year-end

It’s also important to bear in mind the upcoming changes with some sole traders needing to follow the Making Tax Digital (MTD) for Income Tax Self-Assessment, which comes into effect from April next year.

Sole traders generating an annual turnover of over £50,000 will need to comply with the new regulations in place from April 2026. This threshold then gradually decreases to £30,000 from April 2027 and £20,000 from April 2028.

Your Income Tax return from the 2024/25 tax year will determine if and when MTD for Income Tax Self Assessment will apply to you so it’s important you understand how it works.

Under the new regulations, sole traders would need to maintain digital accounting records as HMRC will no longer accept paper documents nor can you key in your declarations through HMRC’s self-assessment website. You will also need to submit quarterly reports to HMRC.

As a sole trader, can I reduce my tax bill?

There are allowable expenses in place that can potentially reduce your tax bill, including office costs, staff costs as well as heating and electricity bills.   There are also claims that you can make that do not have to be related to actual payments made.

However, you will not be able to claim allowable expenses if you use your £1,000 tax-free trading allowance, that is an available alternative if your costs are tiny.

Expert tax advice for all sole traders

You need to understand your tax obligations and if you are struggling, our expert team of tax advisors can help.

We will offer you tailored advice and support to ensure you know what tax to pay, how to complete your tax returns and help you spot any potential to reduce your bill.

For all tax concerns, contact our team today.