"Sole trader" and "self-employed" get used interchangeably, and if you've just started earning money on the side you might not be sure whether either applies to you. This guide explains what a sole trader is, how HMRC decides whether you're trading, and what you have to do about it.
What a sole trader is
A sole trader is the easiest business type to set up and run. You keep your profits after tax, you make the decisions, and there's very little admin compared with a company. The catch is unlimited liability: legally there's no separation between you and the business, so you're personally responsible for any debts it runs up.
Being a sole trader means you're self-employed. HMRC doesn't tax you through PAYE — you report your income and pay your tax through Self Assessment.
Am I actually trading?
This is the part people get wrong. You're likely trading (and therefore self-employed) if you:
- Sell things regularly to make a profit
- Make or buy items specifically to sell on
- Are paid for a service you provide
- Sell regularly — online, at markets, or through ads
- Earn commission selling goods for other people
Signs you're running a business (rather than a one-off) include having several customers, deciding how and when you work, providing your own equipment, and charging an agreed price for the work.
The £1,000 threshold
There's a £1,000 trading allowance. If your gross trading income in a tax year (the total before you take off any costs) is £1,000 or less, you generally don't need to tell HMRC or register at all.
Go over £1,000 and you need to register for Self Assessment and report the income. Note it's measured on gross income, not profit — £1,200 of sales with £900 of costs still puts you over the line even though your profit is only £300.
Sole trader vs limited company
The two most common structures, side by side:
- Sole trader. You and the business are one. Simple to set up, minimal admin, report via Self Assessment, but unlimited personal liability.
- Limited company. A separate legal entity that limits your personal liability — but with more obligations: annual accounts, Corporation Tax, payroll if you take a salary, and Companies House filings.
Most people start as a sole trader because it's the path of least resistance, and incorporate later if liability, tax efficiency at higher profits, or clients' requirements make a company worthwhile.
Your responsibilities
As a sole trader, HMRC expects you to:
- Register for Self Assessment once you're over the £1,000 threshold (by 5 October after that tax year).
- Keep records of your sales and expenses — invoices, receipts, bank statements, mileage.
- File a tax return each year reporting your profit.
- Pay Income Tax and National Insurance on your profits, worked out through Self Assessment.
- Register for VAT if your turnover crosses the VAT threshold (a separate, higher bar most small sole traders never reach).
Getting started
If you've worked out you're a sole trader, the first moves are:
- Register for Self Assessment and get your UTR.
- Open a separate account or at least keep clean records, so business and personal money don't blur.
- Learn what you can deduct — see allowable expenses.
- Get a feel for the bill — see tax and National Insurance.