At a Glance
- You must register with HMRC as self-employed within 3 months of starting to trade
- You will pay Income Tax and Class 2 & Class 4 National Insurance on your profits
- Keep records of all income and expenses from day one
- Your tax return deadline is 31 January each year
- Consider registering for VAT if your turnover exceeds £85,000
- Cash basis accounting is now the default for sole traders
Registering as Self-Employed
If you start working for yourself, you must register with HMRC as a sole trader. You can do this online at GOV.UK. The deadline to register is 5 October in your business’s second tax year.
Here is what that means in plain English: if you start trading in August 2025 (which falls in the 2025/26 tax year that runs from April 2025 to April 2026), you must register by 5 October 2026.
Once registered, HMRC will send you a Unique Taxpayer Reference (UTR) number by post. You need this UTR to file your Self Assessment tax return. It usually arrives within 10 working days (21 if you are abroad).
You will also need to set up a Government Gateway account if you do not already have one. This is how you access HMRC’s online services, including your tax return.
Registration is free. You do not need to form a limited company — being a sole trader is the simplest business structure in the UK.
If you miss the registration deadline, HMRC can charge penalties. The penalty increases the longer you delay, so register as soon as you start trading.
Setting Up Your Bookkeeping
The most common mistake new sole traders make is leaving their record-keeping until tax time. Do not do this. Set up a simple system from day one and spend 15 minutes each week updating it. You will thank yourself later.
Here is the simplest possible system:
Step 1: Open a separate bank account for your business. It does not need to be a business account — a personal current account works fine when you are starting out. The key is keeping business and personal money separate so you do not miss transactions or accidentally claim personal expenses.
Step 2: Choose how you will record transactions. A spreadsheet cash book is the easiest free option. Record every payment received and every expense paid, with dates, descriptions, and categories. Our Self-Employed Log template is designed for exactly this.
Step 3: Keep every receipt. Take a photo on your phone and save it to a folder named with the tax year (e.g., ‘2025-26 receipts’). HMRC accepts photos as evidence.
Step 4: Set a weekly reminder to update your records. Friday afternoon works well for many people. Spend 15 minutes logging the week’s transactions and checking your bank balance matches your spreadsheet.
Step 5: Reconcile monthly. Compare your spreadsheet totals against your bank statement. If they do not match, find the missing transaction before you forget about it.
What Expenses Can You Claim?
One of the biggest benefits of being self-employed is that you can deduct business expenses from your income before you pay tax. This means you only pay tax on your profit, not your total turnover.
You can claim any cost that is incurred ‘wholly and exclusively’ for business purposes. Here are the most common categories:
Office costs: Stationery, printing, postage, phone and internet bills, computer software.
Travel: Business mileage (45p per mile for the first 10,000 miles, 25p thereafter), train fares, parking, tolls. You cannot claim commuting from home to a permanent workplace.
Professional fees: Accountant fees, solicitor fees for business matters, professional subscriptions.
Marketing: Website costs, advertising, business cards, networking events.
Training: Courses that improve your existing business skills. You generally cannot claim for training that prepares you for a new trade.
Use of home: If you work from home, you can claim a proportion of your household bills. HMRC offers simplified rates (£10-£26 per month depending on hours worked) or you can calculate the actual business percentage of your costs.
Other allowable costs: Bank charges, insurance, protective clothing, staff costs (salaries, NI, pension contributions), hiring equipment.
You cannot claim: Entertaining clients, fines and penalties, personal expenses, your own wages or drawings, clothing for everyday wear (even if you only wear it for work).
National Insurance for the Self-Employed
As a sole trader, you pay two types of National Insurance through your Self Assessment tax return:
Class 2 National Insurance is a flat weekly rate (£3.45 per week for 2025/26). You only pay this if your profits are above the Small Profits Threshold (£6,725 for 2025/26). If you earn less than this, you can choose to pay Class 2 voluntarily to maintain your entitlement to the State Pension and certain benefits.
Class 4 National Insurance is a percentage of your profits. For 2025/26, you pay 6% on profits between £12,570 and £50,270, and 2% on profits above £50,270. These thresholds and rates are frozen at 2023/24 levels as part of the government’s tax policy.
Class 2 and Class 4 NICs are calculated automatically when you complete your Self Assessment tax return. You do not need to calculate them yourself.
Tax Rates and Deadlines
Understanding what you owe and when helps you avoid nasty surprises. Here are the key numbers for the 2025/26 tax year:
Income Tax: You pay Income Tax on your profits (income minus allowable expenses). The rates are:
| Band | Taxable Income | Rate |
|---|---|---|
| Personal Allowance | Up to £12,570 | 0% |
| Basic Rate | £12,571 to £50,270 | 20% |
| Higher Rate | £50,271 to £125,140 | 40% |
| Additional Rate | Over £125,140 | 45% |
Key Deadlines:
| Date | What is Due |
|---|---|
| 5 October 2026 | Register for Self Assessment (if you started trading in 2025/26) |
| 31 January 2027 | Submit online Self Assessment and pay any tax owed for 2025/26 |
| 31 July 2027 | Second payment on account towards your 2026/27 tax bill |
Payments on Account
If your tax bill (including Class 4 NIC) is more than £1,000, HMRC will ask you to make ‘payments on account’ towards next year’s tax bill. These are advance payments based on your current year’s tax.
You pay 50% of your estimated next-year tax bill by 31 January, and another 50% by 31 July. When you file your actual return, you either pay the difference (a ‘balancing payment’) or receive a refund if you overpaid.
This catches many new sole traders by surprise. Your first tax bill can feel almost double what you expected because you are paying for the current year and making an advance payment for next year.
Example: Your 2025/26 tax bill is £3,000. You pay:
- £3,000 by 31 January 2027 (the actual tax owed)
- Plus £1,500 as a payment on account for 2026/27
- Total due 31 January 2027: £4,500
- Then another £1,500 by 31 July 2027
If your 2026/27 tax bill turns out to be £3,200, you have already paid £3,000 on account, so you only owe a £200 balancing payment in January 2028.
If your income drops, you can request to reduce your payments on account. But be careful — if you reduce them too much and underpay, HMRC will charge interest.