If you are about to start your business or are currently running a small business, it is important that you understand your tax obligations and when you need to pay them.

There are factors to consider, including how the business is set up and whether you have any employees working for your company.

Businesses in the UK are taxed on profits they make and how this is done is dependent on whether you are a sole trader or own a limited company.

Sole traders need to ensure they have followed the regulations in place and have implemented procedures into their operations.

What must I do once I create my business?

To fulfil your tax obligations, as a sole trader, you will need to set up a Government Gateway account, where you will need to complete an online form.

This form will ask for various details about your business and the work you are planning to complete. Once complete, you will receive a letter from HM Revenue and Customs (HMRC) containing your Unique Taxpayer Reference (UTR) number.

What tax do sole traders need to pay?

As a sole trader, you are personally responsible for paying your company’s debt and taxes.

You will need to pay Income Tax based on the profits your company makes once you surpass the personal tax allowance, which is currently £12,570.

In addition to this, if your company earns over £90,000 across a 12-month period, you may need to register for Value Added Tax (VAT).

However, depending on the type of income you generate, you may be exempt and not need to register.

What other factors do sole traders need to consider?

It’s also important to bear in mind the upcoming changes with some sole traders needing to follow the Making Tax Digital (MTD) for Income Tax Self-Assessment, which comes into effect from April next year.

Sole traders generating an annual turnover of over £50,000 will need to comply with the new regulations in place from April 2026. This threshold then gradually decreases to £30,000 from April 2027 and £20,000 from April 2028.

Your Income Tax return from the 2024/25 tax year will determine if and when MTD for Income Tax Self Assessment will apply to you so it’s important you understand how it works.

Under the new regulations, sole traders would need to maintain digital accounting records as HMRC will no longer accept paper documents. You will also need to submit quarterly reports to HMRC and clarify your tax position.

As a sole trader, can I reduce my tax bill?

There are allowable expenses in place that can potentially reduce your tax bill, including office costs, staff costs as well as heating and electricity bills.

However, you will not be able to claim allowable expenses if you use your £1,000 tax-free trading allowance. Using this means all your expenses will be accounted for in your tax bill.

Expert tax advice for all sole traders

You need to understand your tax obligations and if you are struggling, our expert team of tax advisors can help.

We will offer you tailored advice and support to ensure you know what tax to pay, how to complete your tax returns and help you spot any potential to reduce your bill.

For all tax concerns, contact our team today.