The idea of starting a business is a really exciting time, but it can also be a little daunting, especially in terms of understanding your tax obligations. It can be hard to know where to start, but we’ve put together some steps that should help you on your way.
What is a sole trader?
- You’re self-employed if you run your own business as an individual and work for yourself. This is also known as being a ‘sole trader’.
- You must register with HM Revenue & Customs (HMRC) for self-employment as soon as you start trading.
- A sole trader is a single-owner business, but it doesn’t mean a single-worker business, you can hire staff, or sub-contractors.
- A sole trader is one person who is responsible for all of a business. They’re entitled to all the rewards this brings, but also the risks.
- In the eyes of the law, the business and the owner are the same. This is called “unlimited liability” and the owner is personally liable for the company’s debts and may have to pay for losses made by the business out of their own pocket.
Where do I start?
Firstly, you will need to notify HMRC that you are starting a business. This is really easy and can be done online. Secondly, keep records of absolutely everything in terms of your purchase and sales transactions. Your profits from your business will be subject to income tax and both Class 2 and 4 National Insurance Contributions (NIC). You will need to file a self-assessment tax return each year.
Registering and paying tax and NIC
Once you have notified HMRC that you have started a business, you will be registered for self-assessment and Class 2 NIC. Income tax is charged on the profits of the business for each tax year, and you’ll be able to estimate your tax bill using the online HMRC calculator.
There can be a long delay between making profits and paying your tax (in the January following the end of your first tax year), so budgeting is vital.
In 2026 , HMRC will be introducing a new quarterly filing system known as ‘Making Tax Digital’ for income tax, so it’s important to take advice now regarding how this may affect you in the future.
National Insurance contributions
There are two types of NIC that sole traders pay:
- Class 2 – a small weekly amount paid once a year through your self-assessment tax return which are currently £3.45 per week for 2023/24.
- Class 4 – this is calculated according to your taxable profits that are paid through self-assessment. The rates are currently 9% on profits between £12,570 and £50,270, and 2% on profits over £50,270 for the 2023/24 tax year.
VAT
You may not need to register for VAT if your sales are below the VAT threshold which is currently £85,000. It is a good idea to familiarise yourself with the threshold, because if you do not register when you should, HMRC will fine you.
Calculating profits and losses
You can calculate your profits and losses using the cash basis or the accruals basis.
- Cash basis: This is a simpler way to calculate profits, and it is suitable for smaller businesses. You calculate your profits by subtracting your expenses from your income.
- Accruals basis: This is a more complex way to calculate profits, but it is more accurate. You calculate your profits by taking into account income and expenses that have not yet been received or paid.
Can you claim expenses?
You can deduct certain business expenses from your income to reduce your taxable profits. Common business expenses include:
- Rent
- Marketing
- Hire costs
- Travel costs
- Legal fees
- Employee costs
Working from home
If you work from home, you can deduct a proportion of your home expenses from your income. HMRC has a fixed rate deduction scheme that you can use.
If you are thinking of starting a new sole trader business and need some advice and guidance, get in touch with a member of the team.