← Back to home
UK Tax Guide 2025/26

Complete Sole Trader Tax Guide

Everything you need to know to run your self-employed business correctly, declare your income to HMRC and avoid penalties. Updated for the 2025/26 tax year (6 April 2025 – 5 April 2026).

⚠ Important disclaimer This guide is for informational purposes only. It is not professional tax advice. Tax rules can change and your situation may be different. Always check gov.uk for the latest HMRC guidance and consult a qualified accountant if you are unsure.

Contents

  1. 1. What is a Sole Trader?
  2. 2. How to Register with HMRC
  3. 3. What Income Must You Declare?
  4. 4. Allowable Business Expenses
  5. 5. What You CANNOT Deduct
  6. 6. National Insurance Contributions
  7. 7. Key Deadlines
  8. 8. How to Do Your Year End — Step by Step
  9. 9. Making Tax Digital (MTD) — What Is Coming
  10. 10. Official HMRC Resources on GOV.UK

1. What is a Sole Trader?

A sole trader is the simplest form of self-employment in the UK. You run your business as an individual — there is no legal separation between you and your business. You keep all profits after tax, but you are also personally responsible for any debts.

You can be a sole trader while also having a PAYE job. Many people start self-employment on the side and register as sole traders.

You must register as a sole trader if:

  • Your self-employment income exceeds £1,000 in a tax year (the Trading Allowance)
  • You want to pay voluntary National Insurance to protect your State Pension
  • You have been asked to complete a Self Assessment tax return by HMRC

2. How to Register with HMRC

You must register for Self Assessment with HMRC before you can file your tax return. Here is how to do it step by step:

  1. Create a Government Gateway account — Go to gov.uk and create a personal Government Gateway account if you do not have one. You will need your National Insurance number.
  2. Register for Self Assessment — Log into your Government Gateway account and select 'Register for Self Assessment'. Choose 'I am self-employed' and complete the online form.
  3. Receive your UTR number — HMRC will send your Unique Taxpayer Reference (UTR) by post within 10–15 working days. You will also receive a letter with your activation code for HMRC online services.
  4. Activate your online account — Use the activation code to set up your HMRC online account. You will use this to file your tax return and pay your tax bill every year.

⚠ Deadline: You must register by 5 October after the end of the tax year in which you became self-employed. For example, if you started trading in May 2025, you must register by 5 October 2025. Late registration can result in a penalty.

3. What Income Must You Declare?

You must declare ALL income from self-employment on your SA103 (Self-Employment) supplementary page of your Self Assessment tax return. This includes:

  • Cash payments from customers
  • Payments via bank transfer, PayPal, Stripe or any other method
  • Goods or services received in exchange for your work (bartering)
  • Tips and gratuities related to your trade
  • Income from selling goods online (eBay, Etsy, etc.) if it is a trade

Your taxable profit = total income minus allowable business expenses. Tax is calculated on your profit, not your turnover.

Income Tax Rates 2025/26

Up to £12,570 (Personal Allowance)0%
£12,571 – £50,270 (Basic Rate)20%
£50,271 – £125,140 (Higher Rate)40%
Over £125,140 (Additional Rate)45%

4. Allowable Business Expenses

You can deduct expenses that are incurred 'wholly and exclusively' for business purposes. Below is a full breakdown by category:

Office & admin

  • Stationery, postage, printer ink and paper
  • Software subscriptions (accounting, design, project management)
  • Business telephone and broadband (business portion)

Travel & vehicles

  • Business mileage at HMRC flat rate (45p/mile up to 10,000 miles, 25p after)
  • Train, bus, taxi fares for business travel
  • Parking fees and tolls for business trips

Stock & materials

  • Raw materials or products purchased to sell
  • Packaging costs
  • Delivery and postage costs for sending goods to customers

Financial & legal

  • Accountant or bookkeeper fees
  • Bank charges on your business account
  • Professional subscriptions relevant to your trade

Marketing & advertising

  • Website hosting and domain names
  • Online advertising (Google Ads, social media ads)
  • Business cards, leaflets and promotional materials

Staff costs

  • Wages, salaries and bonuses paid to employees
  • Employer National Insurance contributions
  • Freelancer or subcontractor payments (if they invoice you)

Premises

  • Rent for a business premises or office
  • Business rates and utilities for your premises
  • Repairs and maintenance of business premises

Training & development

  • Courses directly related to your current trade
  • Books and publications for your profession
  • Professional memberships (if required for your work)

💡 Working from home: You can claim a flat rate of £6/week (£312/year) without records, or calculate the actual business proportion of your home running costs (heating, electricity, broadband). You cannot claim your mortgage interest or rent as a sole trader.

5. What You CANNOT Deduct

These are the most common mistakes sole traders make when claiming expenses — HMRC may challenge or disallow them:

  • Your own salary or drawings — your profit IS your income, you cannot pay yourself as an employee
  • Personal clothing — even if you buy it for work (unless it is a uniform or protective gear)
  • Personal mobile phone bill — only the business proportion is allowable
  • Entertaining clients — HMRC does not allow business entertainment as a deduction
  • Fines and penalties — speeding fines, parking tickets or HMRC penalties are never deductible
  • Capital costs — buying a laptop or equipment counts as a capital asset, not an expense (though you can claim Annual Investment Allowance)

6. National Insurance Contributions

As a sole trader, you pay two types of National Insurance (NI) on top of Income Tax:

Class 2 NI — £3.50 per week (2025/26)

Paid if your profits are £6,725 or more. From April 2024, Class 2 is no longer a separate payment — it is collected through your Self Assessment return. If your profits are below £6,725, you can pay voluntarily to protect your State Pension entitlement.

Class 4 NI — 6% and 2% (2025/26)

You pay 6% on profits between £12,570 and £50,270. You pay 2% on profits above £50,270. Class 4 NI is calculated automatically when you file your Self Assessment return. You do not need to calculate it yourself.

7. Key Deadlines

5 October
Register for Self Assessment if you are newly self-employed (e.g. by 5 October 2025 if you started trading in 2024/25)
31 October
Deadline to file your paper Self Assessment tax return (for the previous tax year ending 5 April)
31 January
Deadline to file your online Self Assessment tax return AND pay your tax bill in full
31 January
First Payment on Account due (50% of previous year's tax bill, paid in advance towards next year)
31 July
Second Payment on Account due (another 50% of previous year's tax bill)

Late filing penalties (HMRC):

  • 1 day late: £100 fixed penalty (even if you owe no tax)
  • 3 months late: £10 per day, up to £900 additional penalty
  • 6 months late: 5% of the tax owed or £300 (whichever is greater)
  • 12 months late: A further 5% of the tax owed or £300 (whichever is greater)

8. How to Do Your Year End — Step by Step

The UK tax year runs from 6 April to 5 April the following year. Here is what you need to do after 5 April to close your year correctly:

1
Gather all income records — Collect all invoices, bank statements and payment records from 6 April to 5 April. Total your gross income.
2
Gather all expense receipts — Collect all receipts for business expenses. Categorise them (office, travel, materials, etc.). Total each category.
3
Calculate your profit — Profit = Total Income – Total Allowable Expenses. This is the figure you will be taxed on.
4
Check your mileage log — If you use a vehicle for business, calculate total business miles × 45p (first 10,000 miles) + 25p after. Add this to your expenses.
5
Log into your HMRC account — Go to gov.uk and sign in to your Self Assessment account. Start a new tax return for the year that just ended.
6
Complete the SA100 and SA103 — Fill in the main tax return (SA100) and the self-employment supplementary page (SA103) with your income and expenses figures.
7
Review your tax calculation — HMRC will show you your tax bill automatically after you enter your figures. Check it carefully before submitting.
8
Submit and pay by 31 January — Submit your return online and pay your tax bill by 31 January. If you cannot pay in full, contact HMRC to set up a Time to Pay arrangement.

9. Making Tax Digital (MTD) — What Is Coming

HMRC is introducing Making Tax Digital for Income Tax (MTD for ITSA). This will require sole traders to keep digital records and submit quarterly updates to HMRC instead of an annual return. The rollout is phased:

From 6 April 2026 — income over £50,000

Sole traders and landlords with total income over £50,000 must use MTD-compatible software and submit quarterly updates to HMRC. Around 780,000 people are affected in this first phase.

From April 2027 — income over £30,000

Extended to those with income above £30,000. Around 970,000 additional people will join MTD.

From April 2028 — income over £20,000

Further extended to sole traders with income above £20,000.

💡 If you earn under £50,000, you do not need to do anything yet. Continue filing your annual Self Assessment return as normal. UK Tax Tracker is already built to be MTD-ready — your records are kept digitally and can be exported quarterly.

Ready to track your taxes?

UK Tax Tracker helps you record income, expenses and mileage throughout the year — so your year end takes minutes, not days.

Get started →