Sole Trader Financial Requirements

You must keep records of all your business income and expenses:

• All sales and income, including cash transactions
• Business expenses and purchases
• VAT records (if registered for VAT)
• PAYE records (if you employ staff)
• Invoices, receipts, and proof of purchases
• Bank statements showing business transactions
• Mileage records if you claim vehicle expenses
• Records of goods taken for personal use

Find detailed guidance on what records self-employed people must keep(opens in new tab).

You must keep your records for at least 5 years after the 31 January Self Assessment deadline of the relevant tax year. For example, for the 2025/26 tax year, you must keep records until at least 31 January 2032.

If you send your tax return late, you must keep your records for longer — until 5 years after the date you actually submit the return, or 15 months from the deadline date, whichever is later.

You can choose between two methods for recording business income and expenses:

• Cash basis (simplified)
• — Record income when you receive it and expenses when you pay them. Available if your turnover is £150,000 or less.
• Traditional accounting (accruals)
• — Record income when you invoice and expenses when you receive an invoice, regardless of when money changes hands. Required if turnover exceeds £150,000.

Most small sole traders find the cash basis simpler, but traditional accounting may be better if you have significant outstanding invoices or stock.

If you use your vehicle for business, you must keep detailed mileage records to claim vehicle expenses. Record the date, destination, purpose, and miles for each business journey. You cannot claim for commuting between home and your usual workplace.

You can either claim simplified expenses using HMRC's mileage rates (45p per mile for the first 10,000 miles, then 25p per mile) or claim actual vehicle costs based on the proportion of business use.

You must register with HMRC as soon as possible after you start self-employment. The deadline is by 5 October after the end of the tax year in which you started trading. For example, if you started trading in July 2025, you must register by 5 October 2026.

You can register as a sole trader online(opens in new tab). When you register, you'll be sent a Unique Taxpayer Reference (UTR) which you'll need for your tax returns.

Once registered, you must file a Self Assessment tax return each year. The key deadlines are:

• 5 October — Deadline to register if you're newly self-employed
• 31 October — Paper tax return deadline (if filing on paper)
• 31 January — Online tax return deadline and payment deadline for any tax owed
• 31 July — Second payment on account deadline (if applicable)

Most people file online as it gives you an extra 3 months. Learn more about Self Assessment tax returns(opens in new tab).

If your last Self Assessment tax bill was more than £1,000, you'll usually need to make payments on account. These are advance payments towards your next tax bill:

• First payment on account: 31 January (same day as your tax return)
• Second payment on account: 31 July
• Each payment is half of your previous year's tax bill

If you know your income will be lower, you can apply to reduce your payments on account, but you'll face interest charges if you reduce them too much.

As a sole trader, you pay Income Tax on your business profits. The rates for 2026/27 are:

• Personal Allowance (0%): First £12,570 of income (tax-free)
• Basic rate (20%): £12,571 to £50,270
• Higher rate (40%): £50,271 to £125,140
• Additional rate (45%): Over £125,140

Your Personal Allowance reduces by £1 for every £2 you earn over £100,000, disappearing completely at £125,140.

Sole traders pay two types of National Insurance:

• Class 2 NI
• — £3.45 per week if profits are £12,570 or more (2026/27). Collected through Self Assessment.
• Class 4 NI
• — 9% on profits between £12,570 and £50,270, then 2% on profits above £50,270 (2026/27).

National Insurance contributions count towards your State Pension and certain benefits. If your profits are below £6,725, you can make voluntary Class 2 contributions to protect your entitlement.

If your trading income is £1,000 or less in a tax year, you can use the trading allowance instead of claiming actual expenses. If you use the trading allowance, you don't need to register as self-employed or file a tax return (unless you have other reasons to file).

If your income is more than £1,000, you can either:

• Claim actual expenses (if they're more than £1,000)
• Deduct the £1,000 trading allowance instead of actual expenses

You can deduct business expenses from your income to reduce your tax bill. Expenses must be "wholly and exclusively" for business purposes. Common allowable expenses include:

• Office supplies and equipment
• Business premises costs (if you don't work from home)
• Travel and vehicle costs (not commuting)
• Costs of goods for resale
• Professional fees (accountant, solicitor)
• Business insurance
• Marketing and advertising
• Training related to your business
• Use of home as office (using simplified flat rate or actual costs)

You cannot claim for personal expenses, client entertainment, or costs not related to your trade.

From April 2024, basis period reform changed how sole traders' profits are allocated to tax years. Instead of using your accounting year end, profits are now taxed based on the tax year (6 April to 5 April).

If your accounting year doesn't match the tax year, you'll need to apportion profits. Most accountants recommend aligning your accounting year end with the tax year (31 March or 5 April) to simplify calculations.

Learn more about calculating self-employed income(opens in new tab).

You must register for VAT if your VAT taxable turnover is more than £90,000 (2026/27 threshold) over any rolling 12-month period. You can also register voluntarily if your turnover is below this level, which may be beneficial if you make sales to VAT-registered businesses.

Once registered, you must charge VAT on your sales, submit VAT returns (usually quarterly), and comply with Making Tax Digital (MTD) requirements by using compatible software.

Read about VAT registration(opens in new tab) and Making Tax Digital(opens in new tab).

If you don't register with HMRC as self-employed by the deadline, you may face a penalty of up to £100, and potentially more if you delay further. However, HMRC will usually waive the penalty if you have a reasonable excuse and register as soon as you realise.

Penalties for late Self Assessment tax returns are:

• 1 day late: £100 (even if no tax is owed)
• 3 months late: £10 per day for up to 90 days (maximum £900)
• 6 months late: £300 or 5% of the tax due (whichever is greater)
• 12 months late: £300 or 5% of the tax due (whichever is greater), plus potential tax-geared penalties up to 100% in serious cases

Read more about Self Assessment penalties(opens in new tab).

If you don't pay your tax bill on time, you'll be charged:

• Interest on unpaid tax from the due date
• 30 days late: 5% of the tax unpaid at that date
• 6 months late: Another 5% of the tax unpaid at that date
• 12 months late: Another 5% of the tax unpaid at that date

If you're struggling to pay, contact HMRC as soon as possible to discuss a payment plan. They're often willing to help if you're proactive.

If you understate your income or overclaim expenses, you may face:

• Having to pay the correct tax plus interest
• Penalties of up to 100% of the tax owed (or more in serious cases)
• Criminal prosecution in cases of tax evasion

If you make an honest mistake and tell HMRC as soon as you discover it, penalties are usually lower or waived entirely.

HMRC provides comprehensive support for sole traders:

• Setting up as a sole trader(opens in new tab)
• Self Assessment tax returns(opens in new tab)
• Record keeping for the self-employed(opens in new tab)
• HMRC helpline: 0300 200 3310 (Self Assessment enquiries)
• Online tax account at gov.uk/personal-tax-account(opens in new tab)