In this modern world of freelance jobs and gigging culture, many of us are starting to take business into our own hands – but what does this mean for HMRC and our tax obligations? Read on to learn the ins and outs of this self-employment status, and to see what it might mean for you!

What is a “sole trader”?

According to HMRC, you are a sole trader simply if you are working for yourself – even if you have not notified HMRC or registered any details about your self-employment. In essence, this straightforward definition means that you might already be a sole trader without having realised it.

Being a sole trader means that you get to keep all your profits (after tax) but it also means that you are personally liable for any debts or losses incurred through your business.

Defining “self-employment”

As ever, the details here are key. For instance, you might be wondering where the boundary lies between a casual, one-off sale and self-employed trade? To address such nuances, HMRC provides a handy list of circumstances which might indicate that you are self-employed. Here’s a handy summary of some of the points:

  • You run a business and hold responsibility for its success
  • You sell goods and/or services in order to make a profit
  • You have the flexibility to organise your own schedule and work plan
  • You pay for people to work for you

However, if your small business is registered with Companies House (i.e. as a limited company), then you're no longer regarded self-employed – even if you are the sole appointed officer. In this instance, you are simultaneously the director (owner) and employee of a company in the eyes of HMRC.

Note that sole traders can also trade under a business name. This is distinct from running a limited company and, ultimately, you are still representing yourself. Therefore, even if you are using the term "trading as" in your invoices and other documents, you could still be a sole trader.

Do sole traders pay tax?

Yes. As a sole trader, you must pay tax on your profits if you earn more than £1,000, and you may also need to register for VAT (see below). Since you are self-employed, your business profits will need to be filed as part of your Income Tax Self Assessment.

If your turnover exceeds £85,000, then you must also register for VAT and submit your VAT Return on time (usually every quarter). Online services such as AbraTax can help you to automate this process, helping you to comply on time and avoid stress!

Depending on your business, you might need to charge between 5% and 20% VAT on your products/services, as well as on your labour time. However, some sales (certain foods, children’s clothing, and other “essentials”) fall into the “zero rate” bracket, meaning that they are except from VAT. Check out our overview of VAT for more details!

It is also possible to register for VAT voluntarily, even if you are not yet turning over more than £85,000. Some sole traders do this for peace of mind, or to help boost the perceived reputability of their business among customers.


The definition of “sole trader” is pretty simple, but the devil’s in the details. If you consider yourself self-employed or a freelancer, you might likely fall under this definition. However, if you run your business through a limited company, then you are not qualified as a sole trader. Unlike limited companies, sole traders pay tax on their profits through Self Assessment. Just like limited companies, however, sole traders might also be required to submit VAT Returns.

Disclaimer: We aim to offer educational articles on our blog, focusing on tax-related topics. However, it's important to note that over time, the relevancy of this content might diminish, and we cannot guarantee accuracy. While these articles serve as a tool for enhancing tax knowledge, they are not a replacement for expert advice in accounting, taxation, or legal matters, given the unique nature of each individual's situation. Should you require personalized assistance, we encourage contacting HM Revenue and Customs (HMRC).