Sole Trader
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1.1 Trading or Hobby?

Selling a few things you made, mending a neighbour's chair for cash, or doing occasional freelance work can all count as trading. There is no single test. HMRC and the courts look at a set of indicators called the badges of trade, set out in HMRC's Business Income Manual (BIM20205). No one badge decides the question; the overall picture does.

A restorer who buys tired furniture, repairs it and sells it at fairs every month shows most of the badges; someone clearing an inherited house shows almost none.

1.2 The £1,000 Trading Allowance

Individuals get a trading allowance of up to £1,000 a year of tax-free trading income. It covers self-employment, casual services such as gardening or babysitting, and hiring out personal equipment such as power tools. The key word is gross: the test is your total income before expenses, not your profit.

• Gross trading income of £1,000 or less: this is "full relief". You usually do not need to tell HMRC or register, but you must still keep a record of the income.
• Gross trading income over £1,000: you must register for Self Assessment. On your return you choose either to deduct the £1,000 allowance or to deduct your actual allowable expenses, not both. This is "partial relief".

Use the allowance when your real expenses are below £1,000; otherwise claim the expenses. The allowance cannot create a loss.

You cannot use the trading allowance for income from your employer (or your spouse's or civil partner's employer), from a company you or someone connected to you controls, or from a partnership. Even under £1,000, you need to register if you want to claim a loss, pay voluntary Class 2 National Insurance, claim Tax-Free Childcare or claim Maternity Allowance based on your self-employment.

1.3 Registering as Self-Employed

You can start trading straight away without registering. You register as a sole trader by registering for Self Assessment with HMRC, which also sets you up for National Insurance as a self-employed person. You must register if any of these apply:

• you earn more than £1,000 from self-employment in a tax year (6 April to 5 April)
• you want to pay voluntary Class 2 National Insurance to protect your State Pension and benefits
• you need to register as a subcontractor under the Construction Industry Scheme (Chapter 9)

The deadline is 5 October after the end of the tax year in which you started. If you started trading in the 2026/27 tax year, you must tell HMRC by 5 October 2027. For anyone who started in 2025/26, the deadline is 5 October 2026. Registering late can lead to a "failure to notify" penalty if you have not paid all your tax by 31 January.

If you are already in Self Assessment for another reason, such as rental income, you still need to register as a sole trader so your National Insurance is set up. You need a National Insurance number to register.

1.4 Your UTR and HMRC Online Account

When you register you receive a Unique Taxpayer Reference (UTR), a 10-digit number that may simply be called your "tax reference". It usually arrives by post around 15 days after you register. You can also find it in your Personal Tax Account and the HMRC app.

You manage everything through HMRC online services. There are two ways to sign in: a Government Gateway user ID (up to 12 characters) and password, or GOV.UK One Login (email address and password). If you already use HMRC online services, carry on with the details you have. If you are new, choose "Create new sign in details".

1.5 Sole Trader, Partnership or Limited Company?

Most people start as a sole trader because it is the simplest structure. The alternatives affect your tax, paperwork and personal risk:

Honest pros and cons of incorporating

Company profits are taxed at a 19% small profits rate on profits of £50,000 or less, rising to a 25% main rate above £250,000, with marginal relief in between. Dividends you then take are taxed at 10.75% (basic rate), 35.75% (higher rate) and 39.35% (additional rate) for 2026/27, after a £500 dividend allowance. Whether this beats sole-trader tax depends on your profit, how much you draw, pensions, student loans and benefits, and it must cover the extra accountancy. Limited liability also protects less than people assume: lenders and landlords often want personal guarantees from directors.

2.1 Choosing a Business Name

You can trade under your own name or choose a business name. You do not register a sole trader name anywhere. GOV.UK sets out that a sole trader name must not:

• include "limited", "Ltd", "limited liability partnership", "LLP", "public limited company" or "plc"
• be offensive
• be too similar to another business's trade mark (you may have to change it if someone complains)

The business names rules in Part 41 of the Companies Act 2006 apply to anyone carrying on business in the UK, not just companies. Under section 1194 you need approval to use certain "sensitive" words or expressions, and you should not suggest a connection with government or a local authority without permission. GOV.UK has a list of the words that need permission.

If you trade under a name other than your own surname (with or without your forename or initial), you must show your own name and an address where legal documents can be served on your business letters, written orders, invoices and receipts, and written demands for payment (Companies Act 2006, sections 1201 and 1202). To stop others using your name you would need to register it as a trade mark.

2.2 Bank Accounts

GOV.UK says you might be able to use a personal or a business bank account for your business, and to check with your bank which you can use. Many personal account terms do not allow business use. Either way, keep a separate account used only for the business: it is the biggest time-saver in bookkeeping, and CIS gross payment status requires the business to be run through a bank account.

Add a savings account and move a fixed share of every payment into it for tax; 6.8 shows how to choose the percentage.

2.3 What Records to Keep

You must keep records of all sales and income, all business expenses, VAT records if you are VAT registered, PAYE records if you employ people, and records of your personal income. You do not send them with your return, but you must be able to work out your profit and show the records to HMRC if asked. They must be accurate and you must be able to identify business transactions.

Proof includes receipts for goods and stock, bank statements, sales invoices, till rolls and bank paying-in slips. If you use traditional accounting (2.5) you also need records of what you are owed, what you owe, stock and work in progress at the year end, year-end bank balances, money you put into the business and money you took out for yourself.

Appendix A has a full records checklist.

2.4 How Long to Keep Records

Keep your records for at least 5 years after the 31 January submission deadline for the tax year they relate to. For the 2026/27 tax year, whose online deadline is 31 January 2028, that means keeping records until at least the end of January 2033. If you send a return more than 4 years late, keep the records for 15 months after you send it.

VAT records follow a different rule: VAT Notice 700/21 says to keep business records for VAT purposes for at least 6 years. If you are VAT registered, the simplest policy is to keep everything for at least 6 years. If records are lost, stolen or destroyed and cannot be replaced, you must do your best to provide figures and tell HMRC you have used estimated or provisional figures.

2.5 Cash Basis or Traditional Accounting?

Since 6 April 2024, cash basis is the standard way for sole traders and partnerships without corporate partners to record income and expenses. Under cash basis you record income when you receive the money and expenses when you pay them, so you do not pay Income Tax on money you have not yet received.

You can choose traditional (accruals) accounting instead, recording income and expenses by the date you invoiced or were billed. You might choose it if your business holds a lot of stock, or if you need finance and a lender wants accruals accounts. If you use it, you must say so on your return. Some businesses cannot use cash basis at all, including limited companies, LLPs, and partnerships with a corporate partner.

Whichever you use, record dates consistently. You choose whether "received" means the day money lands in your account or the day a cheque is written, but you must use the same method every year. VAT-registered businesses on cash basis can record figures including or excluding VAT, but must treat income and expenses the same way.

2.6 Choosing Software

A spreadsheet is enough for a small business today, but if your turnover is likely to pass £20,000 you will soon need Making Tax Digital software (Chapter 7). Look for:

• a product on HMRC's list of software compatible with Making Tax Digital for Income Tax (and for VAT, if you are or may become registered)
• a bank feed that imports transactions automatically
• receipt capture from a phone photo
• invoicing that numbers invoices sequentially and tracks what is unpaid
• CIS support if you work in construction; free products exist but may limit transactions

If you prefer spreadsheets, "bridging software" can connect them to HMRC for Making Tax Digital. The hub's invoice generator is useful for producing clean, consistent invoices, but it is not record-keeping software: you still need to log each invoice in your records.

3.1 What an Invoice Must Contain

GOV.UK lists what an invoice must include:

• a unique identification number (number invoices in sequence and never reuse a number)
• your name, address and contact information
• the name and address of the customer you are invoicing
• a clear description of what you are charging for
• the date the goods or service were provided (the supply date)
• the date of the invoice
• the amount or amounts being charged
• the VAT amount, if applicable
• the total amount owed

As a sole trader your invoice must also show your own name and any business name you use and, if you use a business name, an address where legal documents can be delivered to you. Add your payment terms, due date and bank details.

3.2 VAT Invoices

Once you are VAT registered, invoices to VAT-registered customers must be VAT invoices. VAT Notice 700/21 lists what a full VAT invoice must show:

• a sequential number that uniquely identifies the document
• the time of supply (tax point) and the date of issue if different
• your name, address and VAT registration number
• the customer's name and address
• a description sufficient to identify the goods or services
• for each description, the quantity of goods or extent of the services, the rate of VAT and the amount payable excluding VAT
• the total amount payable excluding VAT, the rate of any cash discount offered, and the total VAT chargeable in sterling
• the unit price

If you are not a retailer and a supply is £250 or less including VAT, you may issue a simplified invoice. Special rules apply to invoices under the domestic reverse charge (8.7). You cannot show VAT on invoices until you have your VAT number, although you can raise your prices to cover the VAT you will owe from your effective date of registration, then reissue the invoices as VAT invoices.

3.3 Payment Terms

State your terms on every quote and invoice: when payment is due, how to pay, and what happens if payment is late. For business customers, if you do not agree a payment date the law treats payment as late 30 days after the customer receives the invoice or after you deliver the goods or service, whichever is later. If you do agree a date, it must usually be within 60 days for business transactions (30 days for public authorities); a longer period is possible only if it is fair to both sides.

Shorter terms such as 7 or 14 days are common. For private customers, payment on completion is normal for small jobs.

3.4 Late Payment Law (Business Customers Only)

The Late Payment of Commercial Debts (Interest) Act 1998 gives you rights when another business (not a consumer) pays you late, unless your contract sets a different interest rate.

Statutory interest

Statutory interest is 8% a year plus the Bank of England base rate. The base rate that counts is the one in force on 30 June (for debts that become late between 1 July and 31 December) or on 31 December (for debts that become late between 1 January and 30 June), so the rate is fixed for each half-year. Interest is simple, calculated daily:

Fixed compensation

Once statutory interest starts to run you can also claim a fixed sum for the cost of recovering the debt, once per invoice (section 5A of the Act):

If your reasonable recovery costs are higher than the fixed sum, you can also claim the difference. To add interest and compensation, send a new invoice for those amounts.

3.5 Chasing Payment, Step by Step

1. Before the due date: a polite reminder with the invoice attached catches most problems.
2. Day after due date: a short email or call asking whether there is a problem. Disputes are easier to settle early.
3. 7 to 14 days overdue: a firmer letter stating the amount, the original due date and a new deadline. For business customers, say that you are entitled to statutory interest and compensation.
4. 30 days overdue: a "letter before action" giving a final deadline and saying that you will start a court claim if you are not paid. If your customer is an individual (including a sole trader), the court's Pre-Action Protocol for Debt Claims applies: the letter must go by post with the prescribed information sheet, reply form and financial statement, and you must allow 30 days for a reply. Between businesses, 14 days is common practice. Keep copies of everything.
5. Court claim (3.6), or mediation if the customer engages.

Stay factual, log every contact, and pause new work for that customer until paid.

3.6 Small Claims

In England and Wales you can claim money you are owed from a person or business through the county court, online or by post. The court fee depends on the amount claimed (including interest). Fees on GOV.UK at the time of writing:

If your claim is £10,000 or less and the defendant disputes it, you will be told to attend mediation, which the court organises free of charge. Further fees apply for hearings and enforcement. Scotland and Northern Ireland have their own processes.

4.1 The Basic Rule

Your taxable profit is your income minus your allowable expenses. The legal test (section 34 of the Income Tax (Trading and Other Income) Act 2005) is that an expense must be incurred wholly and exclusively for the purposes of the trade. Where something has a business part and a private part, you can still deduct an identifiable part or proportion that is wholly for the business. So a phone used half for work can be split; a lunch you would have eaten anyway cannot.

GOV.UK's own illustration: if your turnover is £40,000 and you claim £10,000 of allowable expenses, you pay Income Tax on the remaining £30,000. Money you take out of the business for yourself ("drawings") is never an expense. Remember that if you use the £1,000 trading allowance (1.2) you cannot also claim expenses or capital allowances.

4.2 What You Can and Cannot Claim

4.3 Simplified Expenses: Vehicles

Simplified expenses let sole traders (and partnerships with no company partners) use flat rates instead of working out actual costs for three things: vehicles, working from home, and living at business premises. You do not have to use them; HMRC has a checker to compare.

For vehicles, the flat mileage rate replaces the actual costs of buying and running the vehicle (insurance, repairs, servicing, fuel). The rates increased on 6 April 2026:

Example: 11,000 business miles in 2026/27 gives 10,000 × 55p = £5,500 plus 1,000 × 25p = £250, a claim of £5,750. You can claim parking and other travel, such as train fares, on top.

• You cannot use mileage rates for a vehicle you have already claimed capital allowances on, or included as an expense.
• Once you use the flat rate for a vehicle, you must keep using it for as long as you use that vehicle in the business.
• Commercial vehicles designed for the purpose, such as black cabs and dual-control driving instructor cars, cannot use the flat rate.
• Keep a mileage log: date, journey, purpose and miles. Without one, the claim is hard to defend.

4.4 Working from Home

If you work at home for 25 hours or more a month, you can claim a flat monthly amount instead of working out the business share of heating, lighting and similar costs:

The flat rate does not include phone or internet, so claim the business share of those separately at actual cost. The alternative is the actual-cost method: divide household costs on a reasonable basis, such as the number of rooms used for business and the time they are used. GOV.UK's example: four rooms, one used only as an office, electricity of £1,120 a year gives £280; if you only worked there one day a week, £40. With a dedicated workshop or office, actual costs often give more. Before claiming for a room used only for business, ask an accountant about possible Capital Gains Tax and business rates consequences.

4.5 Living at Your Business Premises

A few businesses, such as a guesthouse or small care home, are also the owner's home. Instead of splitting each bill, you add up the total premises costs and deduct a flat amount for private use, based on how many people live there:

GOV.UK's example: a couple running a B&B all year with premises costs of £15,000 deduct 12 × £500 = £6,000 and claim £9,000.

4.6 Capital Allowances and the Annual Investment Allowance

Equipment you keep and use, such as machinery, tools, computers and vans, is treated differently depending on your accounting method:

• Cash basis: claim it as an ordinary allowable expense in the year you pay for it. The exception is cars, which go through capital allowances (unless you use mileage rates).
• Traditional accounting: claim capital allowances. Most plant and machinery qualifies for the Annual Investment Allowance (AIA), which lets you deduct the full cost in the year of purchase, up to £1 million a year (a limit far above what most sole traders spend).

You cannot claim AIA on cars, on items you owned privately before bringing them into the business, or on gifts; claim writing down allowances instead. Business cars get writing down allowances at rates that depend on their CO2 emissions; see GOV.UK's "Business cars" page. If you sell an item you claimed AIA on, the proceeds may become taxable.

For anything also used privately, reduce the claim by the private share. GOV.UK's example: a £600 laptop used half the time outside the business gives a claim reduced by 50%.

4.7 Mixed-Use Items, Phones, Clothing and Training

Phones and internet

Claim the business share. GOV.UK's example: mobile bills of £200 a year, £70 of it business calls, give a £70 claim. A line used only for work is fully allowable.

Clothing

Only protective, specialist or uniform clothing qualifies, plus overalls and aprons used only for work. Ordinary clothes are not allowable even if you only wear them for work.

Training

A course on a new finishing technique for a restorer, or on bookkeeping for any sole trader, supports your existing business and is allowable. A course to retrain as something unrelated is not.

5.1 Working Out an Hourly Rate

The mistake almost every new sole trader makes is to divide the salary they want by 52 weeks of 40 hours. You will not bill that many hours. Holidays, bank holidays, illness, quoting, travel, buying materials, admin and marketing all eat into the week.

Minimum rate = (overheads + target profit before tax) ÷ billable hours a year

Test the result against local rates. The Restoration handbook's business chapter covers pricing models for craft work, such as time and materials versus fixed price, in more detail.

5.2 Quotes and Estimates

In everyday use a quote is a fixed price for a defined job, and an estimate is your best guess of the likely cost. Label your documents clearly, because what you write matters: under section 50 of the Consumer Rights Act 2015, anything you say or write to a consumer about yourself or the service becomes a term of the contract if they take it into account when deciding to go ahead. If no price is fixed at all, section 51 implies that the consumer must pay a reasonable price.

A good written quote states:

• exactly what is included, and what is excluded
• materials and specifications
• the price, and whether it includes VAT (if you are registered, prices to consumers should include VAT)
• how long the quote is valid for
• when work will start and roughly how long it will take
• payment terms, deposit and stage payments
• how changes and unforeseen problems will be priced (written variations, agreed before the extra work)

5.3 Deposits and Stage Payments

A deposit covers materials bought for a specific customer and protects you against cancellation. For long jobs, stage payments limit how much you can lose. Put the amount, what it covers and when it is refundable in writing. Under cash basis, a deposit is income when received.

If you take a deposit from a consumer under an off-premises or distance contract and they cancel within the cancellation period (5.6), you will usually have to refund it, less any proportionate amount for work you started at their express request.

5.4 Contracts and Terms

A clear quote, your terms and conditions and a written acceptance (an email is fine) form a contract. Terms should cover scope and variations, price and payment, deposits, late payment, materials, access, hidden problems, cancellation, and complaints.

For business customers, say that you reserve the right to statutory interest under the Late Payment of Commercial Debts (Interest) Act 1998 (3.4). For consumer customers, terms must be fair and transparent; unfair terms are not binding on consumers under the Consumer Rights Act 2015.

5.5 Working for Consumers: the Consumer Rights Act 2015

When you supply a service to a consumer, the Consumer Rights Act 2015 treats the contract as including these terms, whatever your paperwork says:

• Reasonable care and skill (section 49): the service must be performed to the standard of a competent trader.
• Information is binding (section 50): what you say or write about the service, if the consumer relies on it.
• Reasonable price (section 51): where no price was fixed.
• Reasonable time (section 52): where no time was fixed.

If the service does not meet these terms, the consumer's remedies (section 54) are first a right to require repeat performance (putting it right at your cost, within a reasonable time) and, where that is impossible or not done within a reasonable time, a right to a price reduction, which can be up to the full price.

5.6 Cancellation Rights for Off-Premises and Distance Contracts

Under the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013, a consumer can cancel a distance contract (agreed by phone, email or online) or an off-premises contract (typically agreed in the customer's home) without giving a reason during the cancellation period (regulation 29). For a service contract, that period ends 14 days after the day the contract is made (regulation 30).

• You must give the right information. If you do not give the consumer the required information about the right to cancel, the cancellation period is extended by up to 12 months (regulation 31).
• Starting work within the 14 days. You must not start before the period ends unless the consumer expressly asks you to; for an off-premises contract, that request must be on a durable medium such as paper or email (regulation 36).
• If they then cancel, they pay a proportionate amount for the service supplied up to the time they told you, provided you had given them the cancellation information. If you had not, they pay nothing for work already done.
• If the service has been fully performed at their request, and they acknowledged they would lose the right to cancel, the right to cancel ends.

There are exceptions. Notably, the cancellation rules do not apply to goods made to the consumer's specifications or clearly personalised, or where the consumer specifically asked you to visit to carry out urgent repairs or maintenance (regulation 28). The information requirements for off-premises contracts do not apply where the consumer pays £42 or less (regulation 7).

As a sole trader you pay Income Tax and Class 4 National Insurance on your profit, not your turnover, through Self Assessment. There is no tax deducted as you go (unless you work under CIS), so you have to put money aside yourself.

6.1 The Personal Allowance

The standard Personal Allowance for 2026/27 is £12,570: the amount of income you can have before paying Income Tax. It is reduced by £1 for every £2 of adjusted net income above £100,000, so it is zero at £125,140 or above. In that band the taper creates a very high effective marginal rate; pension contributions reduce adjusted net income, so take advice.

The allowance applies to your total income, so if you also have a job that already uses it, all your self-employed profit is taxed from the first pound.

6.2 Income Tax Bands: England, Wales and Northern Ireland

6.3 Scottish Income Tax

If you live in Scotland, you pay Scottish Income Tax on your earnings, including self-employed profit. The Personal Allowance is the same; the bands are different:

National Insurance is UK-wide, so a Scottish sole trader pays Class 4 at the same thresholds as everyone else. Scottish residents pay the UK rates on savings and dividend income.

6.4 National Insurance: Class 2 and Class 4

Self-employed National Insurance changed significantly from April 2024. For 2026/27:

Most people pay Class 4 through Self Assessment along with Income Tax. Whether paying voluntary Class 2 is worth it depends on your whole National Insurance record (a job or credits may already cover the year), so check your record on GOV.UK before paying.

6.5 Payments on Account

Payments on account are advance payments towards your next tax bill, including Class 4 NI. Each is usually half of last year's bill, due on 31 January (during the tax year) and 31 July (after it ends). You do not have to make them if either:

• last year's Self Assessment bill was less than £1,000, or
• you paid more than 80% of last year's tax outside Self Assessment, for example through your tax code or by CIS deductions

Any shortfall is paid as a balancing payment by the following 31 January, which also carries student loan repayments and any Capital Gains Tax. If you will clearly earn less this year, you can ask HMRC to reduce your payments on account online or with form SA303, but you pay interest if you reduce them too far.

6.6 The Self Assessment Calendar

The tax year runs from 6 April to 5 April. Diagram 1 shows the deadlines that flow from the 2026/27 tax year.

For 2026/27: register by 5 October 2027 if you are new; paper return by 31 October 2027; online return, balancing payment and first payment on account for 2027/28 by 31 January 2028. Appendix A.1 lists every date.

For the return currently due, 2025/26: paper by 31 October 2026, online and payment by 31 January 2027. If you register after 5 October, HMRC gives you a filing deadline 3 months from its letter, but the payment deadline stays 31 January.

6.7 Penalties and Interest

The current Self Assessment penalties

Late payment adds penalties of 5% of the unpaid tax at 30 days, 6 months and 12 months. On top, HMRC charges late payment interest at the Bank of England base rate plus 4% (the margin rose from 2.5% on 6 April 2025). At the time of writing GOV.UK showed 7.75% from 9 January 2026; the rate moves with base rate. You can appeal a penalty if you have a reasonable excuse.

The new points-based penalties

If you are using Making Tax Digital for Income Tax, new penalties apply from the tax year you join (7.6). HMRC says that from April 2027 the new penalties will apply to everyone who submits a personal Self Assessment return. Check GOV.UK for exactly which return that first affects in your case.

6.8 A Fully Worked Example

Assumptions: tax year 2026/27; lives in England; sole trader with no other income; turnover £58,000; allowable expenses £14,000; standard Personal Allowance; no pension contributions, student loan, CIS deductions or Gift Aid; first year in Self Assessment, so no payments on account made yet.

The bill is about 18.6% of profit, but each extra pound of profit in this band costs 26% (20% + 6%), which is why setting aside 25% to 30% of each receipt is a safer habit than 20%.

The same profit in Scotland

On £44,000 profit, Scottish Income Tax is: 19% on £3,967 (£753.73), 20% on £12,989 (£2,597.80), 21% on £14,136 (£2,968.56) and 42% on the final £338 (£141.96), a total of £6,462.05. Class 4 is the same £1,885.80, giving £8,347.85.

A higher profit in England

At £60,000 profit: Income Tax is 20% of £37,700 (£7,540) plus 40% of £9,730 (£3,892), so £11,432. Class 4 is 6% of £37,700 (£2,262) plus 2% of £9,730 (£194.60), so £2,456.60. Total £13,888.60.

6.9 Your Accounting Year

Since the 2024/25 tax year, sole traders are taxed on the profit arising in the tax year itself, whatever date your accounts are made up to. If your accounts run to 31 March or 5 April, nothing changes. If you use another year end, such as 30 June, you have to apportion profits from two sets of accounts to the tax year, which is extra work. Most new sole traders should use a 31 March or 5 April year end.

Making Tax Digital for Income Tax started on 6 April 2026. It does not change how much tax you pay or when. It changes how you keep records and report: in compatible software, with quarterly summaries and the tax return sent from the same software.

7.1 Who Has to Use It, and When

You need to use MTD for Income Tax if you are a sole trader or landlord registered for Self Assessment, you have self-employment or property income (or both), and your qualifying income is over the threshold for the relevant year:

HMRC writes to people over the threshold, but if you get no letter it is still your responsibility to check. Partnerships will join later, on a timetable not yet announced.

7.2 Qualifying Income Is Turnover, Not Profit

This catches people out. Qualifying income is your total self-employment and property income before expenses (turnover), from the return for the relevant year. A joiner with £34,000 of turnover and £9,000 of profit is over the £30,000 threshold. Self-employment and property income are added together: GOV.UK's example is £25,000 of rent plus £27,000 from self-employment, giving £52,000.

Employment income, your share of partnership profit, dividends and pensions do not count. If you started part-way through a year, HMRC annualises your self-employment income (six months of trading counts double). Once you are in, you can opt out only if your qualifying income stays below the threshold for 3 tax years in a row.

7.3 Software and Digital Records

You need software that works with MTD for Income Tax. It can be a single product that does everything, or spreadsheets plus bridging software that sends the figures to HMRC. Your digital records must cover each item of self-employment income and expense. Rules to know:

• If you use more than one product, records must be digitally linked (linked cells, file import and export, API transfer). Once a record has been sent in a quarterly update, you must not copy and paste or retype it into another product.
• If your turnover from the business is under £90,000, you can use simpler categorisation: a sole trader only needs to record whether each transaction is income or an expense. If turnover reaches £90,000, you must categorise the whole year in full.
• Keep your original invoices, receipts and statements as well.
• If you have two sole trader businesses, keep separate records and send separate updates for each.

Before you can sign up you must be registered for Self Assessment and have filed a return in the last 2 years. Sign-up is on GOV.UK, and you authorise your software to connect to HMRC.

7.4 Quarterly Updates

Every three months your software adds up your records into totals for each income and expense category and sends them to HMRC. These quarterly updates are summaries, not tax returns. You do not need to make accounting or tax adjustments before sending them, and HMRC does not see individual receipts or invoices.

Each update is cumulative: it covers from the start of the tax year to the end of the period, not just the last three months. So if you find a mistake in July's figures, you simply correct the record and the next update carries the correction.

• If your accounts run to 31 March, choose calendar update periods in your software before you send the first update. You cannot change for that year after sending one.
• You must send an update even if you had no income or expenses in the period.
• You can send an update any time after the period ends, up to the deadline, or up to 10 days early if you know you will have no further transactions.
• After each update you can see an estimate of your tax bill.

7.5 The Tax Return (the "Final Declaration")

After the year ends you make any accounting and tax adjustments (for example capital allowances, private use, or resending the fourth update to correct errors), add any other income such as savings interest, and submit your tax return through your MTD software by 31 January after the tax year. Older HMRC material called this step the "final declaration"; current GOV.UK guidance calls it submitting your tax return. HMRC adds information it already holds, such as PAYE income, CIS deductions and student loan plan type, and you must check it before submitting.

Payment dates do not change.

7.6 Penalties under MTD

• Late submissions are points-based. Each missed deadline earns one point (only one per deadline, however many businesses you have). At 4 points you get a £200 penalty, and another £200 for each further missed deadline. Points below the threshold expire after 24 months.
• 2026/27 concession: HMRC will not give penalty points for late quarterly updates in the 2026/27 tax year. You still have to send all four before you can submit your return, and points still apply to a late tax return.
• Late payment penalties are proportionate to how late you pay. For tax owed for 2026/27: nothing if paid within 15 days; 3% of the tax owed at day 15 if paid between days 16 and 30; a further 3% at day 30, plus 10% a year on the outstanding amount from day 31. For 2027/28 the two percentages become 4%. In your first year under the new penalties you get 30 days before any penalty applies. These penalties do not apply to payments on account. Late payment interest is charged as well.

7.7 Exemptions

Some people are exempt, automatically or on application. The main application route is for people who are digitally excluded: for example, age, a health condition or disability stops you using a computer, tablet or smartphone; you belong to a religious society whose beliefs are incompatible with digital records; or you cannot get internet access at home, at work or at a suitable alternative location. HMRC will not accept an application whose only reason is that you filed on paper before, are unfamiliar with software, have few records, or that MTD will cost time or money. There is also a route to a temporary exemption lasting until April 2027 at the earliest. If you are exempt you still file a Self Assessment return as normal. If you have an agent who keeps your records digitally, you may not need an exemption at all. Apply to HMRC before you are due to start; HMRC's guidance sets out who can apply and when.

8.1 The Threshold and When to Register

You must register for VAT if your VAT taxable turnover goes over £90,000. Taxable turnover is the total of everything you sell that is not VAT-exempt or outside the scope of VAT, including zero-rated and reduced-rated sales. It is a rolling 12-month figure, not your tax-year turnover, and there are two tests:

• Looking back: if your taxable turnover for the last 12 months goes over £90,000, register within 30 days of the end of the month in which you went over. Your effective date of registration is the first day of the second month after you went over. GOV.UK's example: over the threshold on 15 July, register by 30 August, effective 1 September.
• Looking forward: if you expect taxable turnover in the next 30 days alone to go over £90,000 (for example, one large contract), register by the end of that 30-day period, effective from the date you realised.

Register late and you owe VAT on everything you sold from the date you should have been registered, whether or not you charged it, and possibly a penalty. If you go over the threshold only temporarily, you can apply for a registration "exception". Once registered, you can cancel your registration if taxable turnover falls below £88,000.

You get a 9-digit VAT number, which must appear on all your invoices, and HMRC signs you up for Making Tax Digital for VAT.

8.2 Voluntary Registration

You can register below £90,000. It makes sense when:

• most of your customers are VAT registered businesses, who can reclaim the VAT you charge, so it costs them nothing
• you pay a lot of VAT on materials and equipment, which you could then reclaim
• you sell mainly zero-rated goods, so you would be reclaiming VAT on costs without charging any

It rarely makes sense when most customers are private individuals: you either add 20% to your prices or absorb it from your margin, and the VAT you reclaim on costs rarely makes up the difference.

8.3 The Flat Rate Scheme

Under the Flat Rate Scheme you charge customers VAT at the normal rate but pay HMRC a fixed percentage of your VAT-inclusive turnover, keeping the difference. In exchange you cannot reclaim VAT on purchases, except on certain capital assets costing over £2,000.

• Join if you expect VAT taxable turnover of £150,000 or less (excluding VAT) in the next 12 months; you must leave if it goes over £230,000.
• You get a 1% discount in your first year of VAT registration.
• If you spend very little on goods (less than 2% of turnover, or less than £1,000 a year if more than 2%), you are a limited cost business and pay 16.5%, which removes most of the benefit.
• You cannot use it alongside the Cash Accounting Scheme; it has its own cash-based turnover method.

The percentage depends on your business type. Some examples from GOV.UK's table:

8.4 Cash Accounting and Annual Accounting

The Cash Accounting Scheme means you pay VAT on sales when your customers pay you and reclaim VAT on purchases when you pay your suppliers, instead of by invoice date. It protects your cash flow when customers pay slowly, and you never pay VAT on a bad debt. Join with taxable turnover of £1.35 million or less; leave above £1.6 million.

The Annual Accounting Scheme means one VAT return a year, with advance payments during the year based on your last return (or an estimate if you are new), and a balancing payment or refund with the return. Same turnover limits. It does not suit businesses that usually get VAT refunds, since you would get only one refund a year.

8.5 VAT Returns and Making Tax Digital for VAT

VAT returns are usually quarterly. The deadline for filing and for payment to reach HMRC is usually one calendar month and 7 days after the end of the period. All VAT-registered businesses are now signed up for Making Tax Digital for VAT, so you must keep digital VAT records and file through compatible software. It is separate from MTD for Income Tax, with separate penalty points.

Rates: standard 20%, reduced 5%, and zero. To add 20% VAT, multiply the net price by 1.2; to find the VAT inside a VAT-inclusive price, divide by 1.2 and subtract.

8.6 Labour and Materials for Trades

When you are VAT registered and supply a job that includes materials, the job is normally a single supply: VAT is charged on the whole price, labour and materials together, at the rate that applies to the work. Most repair, maintenance and improvement work on existing homes is standard-rated. Some construction work is zero-rated or reduced-rated at 5%, for example certain work on new dwellings, residential conversions and the renovation of long-empty homes, usually with conditions and sometimes certificates. HMRC's VAT Notice 708 (Buildings and construction) sets out the rules; check it before quoting a reduced rate.

If you are not registered, the VAT you pay on materials is simply part of your cost.

8.7 The Domestic Reverse Charge for Construction

The VAT domestic reverse charge applies to most supplies of building and construction services that are standard or reduced-rated, where both supplier and customer are VAT registered and the payment is reported within the Construction Industry Scheme. The list of services matches CIS "construction operations": building, altering, repairing, extending and demolishing buildings and structures; installing heating, lighting, power, drainage, sanitation, water supply and fire protection systems; painting and decorating; and associated site work.

Under the reverse charge, the supplier does not charge VAT; the customer accounts for it to HMRC instead. Your invoice must make clear that the reverse charge applies. It does not apply:

• to work for private domestic customers, who are not VAT registered: charge VAT normally
• where the customer tells you in writing that it is an end user (a VAT and CIS registered business that does not supply the construction services onwards) or an intermediary supplier connected to the end user
• to some services when supplied on their own, such as the professional work of architects and surveyors, installing security systems, or installing seating, blinds and shutters

If the reverse charge element is 5% or less of a single supply, it can be disregarded (the "5% disregard"). It can affect cash flow, since you no longer collect VAT to offset VAT on materials. HMRC's technical guide has flowcharts.

9.1 When CIS Applies

Under the Construction Industry Scheme, contractors deduct money from payments to subcontractors and pass it to HMRC as an advance towards the subcontractor's tax and National Insurance. It covers most construction work on permanent or temporary buildings and structures and civil engineering, including site preparation, demolition, building, alterations, repairs and decorating, installing heating, lighting, power, water and ventilation systems, and cleaning inside buildings after construction work.

It does not cover, for example, architecture and surveying, scaffolding hire with no labour, carpet fitting, making materials, delivering materials, or non-construction work on site such as running a canteen. CIS is about payments from contractors; work you do directly for a private householder is outside CIS, because a householder is not a contractor.

A restorer refurbishing loose furniture is not doing construction work; one repairing fixed joinery for a builder may well be.

9.2 Registering as a Subcontractor

Subcontractors do not have to register, but if you are not registered, contractors must deduct 30% instead of 20%. To register you need your legal name (and trading name if different), your UTR, your VAT number if registered, and the date you started. If you do not yet have a UTR, register as a new business for Self Assessment and choose "working as a subcontractor": you are registered for both at once.

When you start with a new contractor, give them exactly the details you registered with. They must verify you with HMRC before paying you, and if the details do not match, they will deduct at 30%.

9.3 Deductions and Statements

Deductions are taken from the labour element. Contractors do not deduct from VAT, materials you paid for directly, consumable stores, plant hired for the job, or manufacturing and prefabricating materials. Show materials separately on your invoices and keep the receipts, because the contractor may ask for evidence and, without it, will estimate.

Each month the contractor must give you a payment and deduction statement within 14 days of the end of the tax month (tax months run from the 6th to the 5th). Keep every one: they are your proof of tax paid. If a contractor goes out of business and you cannot get statements, write to HMRC with the details.

9.4 Claiming Your Deductions Back

As a sole trader, you record your total pay before deductions as income on your Self Assessment return and the total CIS deductions in the CIS box. HMRC works out your tax and NI and takes off the deductions. If too much was deducted, which is common when you have expenses, you get a refund. If tax is still owed, it is due by 31 January.

Because CIS deductions count as tax paid outside Self Assessment, a subcontractor who has more than 80% of their bill covered by deductions does not have to make payments on account (6.5).

9.5 Gross Payment Status

With gross payment status, contractors pay you in full and you pay all your tax through Self Assessment. To qualify as a sole trader you must show HMRC that:

• you have paid your tax and National Insurance on time in the past
• your business does construction work (or provides labour for it) in the UK
• your business is run through a bank account
• your turnover for the last 12 months, ignoring VAT and the cost of materials, was at least £30,000

HMRC reviews gross payment status every year and can withdraw it if you are late with returns or payments (a small amount of lateness is tolerated). If it is cancelled, you must wait a year before reapplying. Gross status helps cash flow, but it means you must be disciplined about setting tax aside.

9.6 If You Take On Subcontractors

If you pay others for construction work, you are a contractor and must register as one before taking on your first subcontractor (through the process for setting up as a new employer). You must then:

• check whether the person should really be an employee (you can be penalised if so)
• verify each subcontractor with HMRC before paying them
• make the deductions HMRC tells you to and pay them to HMRC by the 22nd of the month (19th if paying by post)
• file a monthly return by the 19th after the end of each tax month, including nil returns where required, and give subcontractors their statements

Late monthly returns start at a £100 penalty and increase with time.

10.1 Insurance

On employers' liability, GOV.UK says you can be fined £2,500 for every day you are not properly insured, and £1,000 if you do not display the certificate where employees can see it or show it to inspectors. You do not need it if you only employ a close family member (GOV.UK lists the relationships), or someone based outside England, Scotland and Wales. Business insurance premiums are allowable expenses.

10.2 Data Protection and the ICO Fee

Under the Data Protection (Charges and Information) Regulations 2018, organisations, including sole traders, that use personal information must pay a data protection fee to the Information Commissioner's Office (ICO) unless they are exempt. The Schedule to the Regulations exempts processing only for:

• staff administration
• advertising, marketing and public relations for your own business
• keeping accounts and records of purchases and sales, deciding whether to accept someone as a customer or supplier, and financial forecasting
• processing that is not done on a computer or other automated means at all

plus some non-business categories. If everything you do with personal data falls within those purposes, you are exempt. Anything beyond them, such as CCTV for crime prevention, can bring you into the fee, so use the ICO's online self-assessment to check. For a small business that needs to pay, the ICO's tool gives tier one, £52 a year, with a £5 discount for paying by direct debit (figures shown by the ICO tool in October 2026).

10.3 Pensions

Nobody will set up a pension for you. The two parts are:

• State Pension: built through your National Insurance record. With profits of £7,105 or more for 2026/27, Class 2 is treated as paid and the year counts. Below that, consider voluntary Class 2 at £3.65 a week (6.4).
• Private pension: a personal pension or SIPP. Contributions get tax relief on up to 100% of your annual earnings. With relief at source, the provider claims basic-rate relief (20%) and adds it to your pot, so £80 from you becomes £100. Higher and additional rate taxpayers claim the extra relief on their Self Assessment return. The annual allowance is £60,000 for 2026/27, with unused allowance from the previous 3 years available to carry forward in some cases.

Contributions also reduce adjusted net income, which matters near the £100,000 taper (6.1).

10.4 Student Loan Repayments

If you are self-employed, HMRC works out your student loan repayment from your Self Assessment return, based on your total income for the year, and you pay it with your tax by 31 January as part of the balancing payment. The 2026/27 thresholds and rates:

Example: on Plan 2 with £44,000 profit and no other income, the repayment is 9% × (£44,000 − £29,385) = £1,315.35, on top of the £8,171.80 in 6.8. If you are also employed, repayments taken through PAYE are deducted. Tell HMRC your plan type on your return.

10.5 Universal Credit and the Minimum Income Floor

If you claim Universal Credit while self-employed, you report your income and expenses at the end of every monthly assessment period, even if you earned nothing. If your work coach agrees self-employment is your main, regular, organised work with a view to profit, you are "gainfully self-employed" and may have your payment worked out using a minimum income floor: an assumed level of earnings based on what an employed person on the minimum wage would expect to earn in similar circumstances. If you earn less than the floor, the floor is used, so your Universal Credit is lower than your actual income would suggest.

You may be eligible for a 12-month start-up period during which the floor does not apply. Northern Ireland has its own rules.

11.1 A Weekly and Monthly Routine

Half an hour a week keeps the admin under control and makes Making Tax Digital painless.

Every week

• Send invoices for completed work; do not let them build up.
• Photograph receipts and match them to bank transactions in your software.
• Record business mileage.
• Move your tax percentage of everything received into the tax savings account.

Every month

• Chase overdue invoices (3.5).
• Reconcile the bank account in your software.
• If you are not VAT registered, add up taxable turnover for the last 12 months and compare it with £90,000 (8.1).
• CIS subcontractors: check you have each contractor's statement. CIS contractors: verify, pay and file by the 19th and 22nd.
• Universal Credit claimants: report income and expenses for the assessment period.

11.2 The Year at a Glance

Appendix A.1 lists every 2026/27 deadline. Around them, a few seasonal jobs are worth fixing in your diary:

• March: year-end planning. Time equipment purchases and pension contributions; count stock and work in progress if you use traditional accounting.
• April: archive last year's records, check the new rates on GOV.UK, and start last year's return. CIS subcontractors due a refund should file early.
• July: second payment on account. If this year is clearly worse, consider reducing your payments on account.
• Autumn: finish last year's return well before January, while queries can still be sorted out.
• As they fall due: renew insurance and the ICO fee, and check VAT return dates in your VAT online account.

11.3 When to Hire an Accountant

Plenty of sole traders with simple affairs do their own books and return. Consider paying for help when:

• you are near the VAT threshold or choosing a VAT scheme
• you are thinking of incorporating, taking on a partner, employing someone or becoming a CIS contractor
• profits are nearing £50,270 or £100,000
• HMRC opens an enquiry, or you have fallen behind
• your admin time would earn more spent working

Choose someone who belongs to a recognised professional body, holds professional indemnity insurance and confirms their fee in writing.

11.4 HMRC Scams

Common signs of a scam: a text or email offering a tax refund with a link; a call threatening legal action unless you pay now; a request to pay by gift card or to a personal account; a message asking you to "verify" your sign-in details. Report them:

If you think you have given away personal details, contact HMRC's security team. If you have lost money, report it to Report Fraud (England and Wales) or Police Scotland. The safe habit: never use a link or number from a message; go to GOV.UK or the HMRC app yourself.

11.5 Common Problems and Fixes

Three fictional sole traders, worked through with 2026/27 figures.

12.1 A Part-Time Maker Under the Trading Allowance

12.2 A Full-Time Joiner Working Under CIS

12.3 A Restorer Approaching the VAT Threshold

A.1 Key Dates for the 2026/27 Tax Year

Every month: CIS contractors file by the 19th and pay by the 22nd. Every VAT period: return and payment usually one month and 7 days after the period ends.

A.2 Records Checklist

• Sales invoices, numbered in sequence, and a list showing which are paid
• Records of cash and card takings (till rolls, card reader reports)
• Receipts and supplier invoices for every expense
• Business bank and card statements
• Mileage log (date, journey, purpose, miles)
• Hours worked at home, if using the flat rate
• Asset register: equipment bought and sold, with dates and costs
• CIS payment and deduction statements
• VAT records and VAT returns, if registered
• Payroll records, if you employ anyone
• Copies of tax returns, HMRC letters and payment confirmations
• Traditional accounting only: debtors, creditors, stock and work in progress at the year end
• Records of money you put in and took out

Keep them for at least 5 years after the 31 January deadline for the year (6 years for VAT records).

A.3 Expense Categories on the Tax Return

The full self-employment pages (SA103F) and Making Tax Digital use the same categories. If your turnover is below £90,000 you can enter a single total for expenses.

A.4 GOV.UK Pages to Check

• Income Tax rates and Personal Allowances and Scottish Income Tax
• Self-employed National Insurance rates
• Trading and property allowances
• Set up as a sole trader and register for Self Assessment
• Self Assessment deadlines and penalties
• Payments on account
• Business records if you're self-employed
• Cash basis and simplified expenses
• Expenses if you're self-employed and capital allowances
• Invoicing and late commercial payments
• Make a court claim for money
• Do you need Making Tax Digital for Income Tax? and using it
• MTD for Income Tax penalties
• How VAT works, register for VAT and the Flat Rate Scheme
• VAT domestic reverse charge for construction
• CIS for subcontractors and contractors
• Employers' liability insurance
• ICO data protection fee
• Repaying your student loan
• Self-employment and Universal Credit
• Report scams and phishing