Do I need to pay tax if my sole trader business earns under the personal allowance?

Do I need to pay tax if my sole trader business earns under the personal allowance?

If you’re running a sole trader business and your profits are lower than the personal allowance, it’s natural to assume you won’t owe any tax at all. In many cases, that assumption is partly true—but it’s rarely the whole story. In the UK, whether you “pay tax” depends on what kind of tax we’re talking about, how much profit you actually made (not just how much money came into your bank account), what other income you have, and whether National Insurance applies.

This article explains how the personal allowance works for sole traders, what “under the allowance” really means in practice, and why you might still need to register for Self Assessment and file a tax return even if you ultimately pay nothing. It also covers National Insurance, payments on account, common misunderstandings about turnover versus profit, and practical steps you can take to stay compliant without overpaying.

Understanding the personal allowance in plain English

The personal allowance is the amount of income you can receive in a tax year before you start paying Income Tax. For many people, it’s a single figure that acts like a “tax-free band.” If your taxable income stays below that amount, your Income Tax bill may be zero.

However, the key phrase is taxable income. As a sole trader, you don’t pay Income Tax on your sales or on the money that hits your bank account. You pay Income Tax on your profit, which is broadly your business income minus allowable business expenses (and possibly minus certain reliefs). Your personal allowance applies to your total taxable income across the year, not just your business profits.

So, a correct starting point is: if your total taxable income for the year is below your personal allowance, your Income Tax may be zero. But you still might have other obligations, and you might still owe other types of charges such as National Insurance depending on your circumstances and thresholds.

Profit vs turnover: the most common source of confusion

When people say their business “earns under the personal allowance,” they might mean one of several things:

1) Their turnover (sales) is below the personal allowance.

2) Their profit (income minus expenses) is below the personal allowance.

3) Their profit is below the personal allowance, but they also have a job or other income.

Only the second statement (profit below the allowance) is directly relevant to Income Tax on self-employment. Turnover can be low or high and still produce very different profits depending on your costs. For example, a photographer might have £15,000 turnover but £8,000 of equipment costs, subscriptions, travel, and insurance, leaving £7,000 profit. Another business might have £9,000 turnover with almost no expenses, leaving £8,500 profit.

To determine whether you are under the personal allowance, you need to calculate your taxable profit for the year, and then add any other taxable income you had. The personal allowance applies after you consider the whole picture.

How sole trader profits are taxed

As a sole trader, you’re taxed as an individual. Your business profits are treated as part of your personal income. You’ll usually calculate your profits over the tax year (6 April to 5 April) and declare them via Self Assessment.

In simplified terms, the steps look like this:

1) Work out your self-employed profit: business income minus allowable expenses (or use the trading allowance if applicable).

2) Add any other taxable income you have (employment, pensions, benefits that are taxable, rental income, dividends, savings interest, etc.).

3) Apply any relevant deductions and reliefs.

4) Apply your personal allowance to the total taxable income.

5) Calculate Income Tax due on any amount above the personal allowance.

If your total taxable income is below the personal allowance, you may have no Income Tax to pay. But this does not automatically remove the need to register or file a return, and it does not automatically remove National Insurance.

Do you still need to register for Self Assessment?

Many people assume that if they owe no Income Tax, they don’t need to do anything. In reality, the requirement to register and file depends on your circumstances and HMRC rules, not purely on whether tax is due.

If you are self-employed, HMRC typically expects you to register for Self Assessment if you have self-employment income above certain reporting thresholds, or if HMRC has issued you a notice to file. There are also situations where you might need to file even with low profits because you have other taxable income or you need to claim something (for example, certain reliefs, tax credits adjustments, or student loan calculations if relevant).

Also, once HMRC issues you a notice to file a tax return, you generally must submit it by the deadline even if your tax bill is zero. Ignoring a filing obligation can trigger penalties, regardless of the amount of tax due.

The practical takeaway is that “under the personal allowance” is not the same as “no paperwork.” It can be, but you must confirm that you either don’t need to register or that you have complied with any notice to file.

What if you have a job as well as being self-employed?

Having employment income changes the calculation dramatically. Your personal allowance is not “separate” for your job and your business. It’s one allowance covering your total taxable income across the tax year.

Imagine you earn £12,000 from a part-time job and £4,000 profit from your sole trader business. Even if £4,000 is below the personal allowance on its own, your combined income is £16,000, which likely means some of your income is above the personal allowance and subject to Income Tax. In that case, you could owe tax on part of your self-employed profits even though the business profit alone looks “under the allowance.”

Similarly, if your employment already uses up all your personal allowance through PAYE, then your self-employed profit may be taxed from the first pound. The reverse can also happen: if your job income is small, your remaining allowance might cover your business profits.

So, the question is not “is my business under the personal allowance?” but “is my total taxable income under the personal allowance?”

National Insurance: the reason you might still pay something

This is the part that surprises many new sole traders. Even if you pay no Income Tax because your profits are low, you might still need to pay National Insurance contributions depending on thresholds and the specific rules in force for the tax year.

National Insurance for self-employed people has historically included different “classes,” and the structure has changed over time. In general, the idea is that self-employed National Insurance can be due based on your profits, and it can be separate from Income Tax. This means it’s possible to owe National Insurance even when Income Tax is zero.

Whether you owe National Insurance will depend on your profit level and the thresholds for that tax year. Some years have had a flat weekly contribution for certain profit levels, and additional profit-based contributions above certain limits. There are also situations where you may be able to claim a small profits exemption or pay voluntary contributions to protect access to certain benefits.

Because these rules can change, and because they depend on the specific tax year and your personal circumstances, it’s important not to assume “under the personal allowance” means “no National Insurance.” The safest approach is to check the relevant thresholds for the year you’re reporting and calculate both Income Tax and National Insurance.

Trading allowance vs personal allowance: don’t mix them up

Another common misunderstanding is confusing the personal allowance with the trading allowance. The trading allowance is a separate rule that can allow you to earn a small amount of trading income without needing to deduct expenses in the usual way. Instead of claiming actual expenses, you can sometimes use a flat allowance against your trading income.

However, the trading allowance is not the same as the personal allowance. You don’t get to apply the personal allowance directly to turnover. You calculate taxable profit first (using either allowable expenses or the trading allowance), then you apply the personal allowance to your total taxable income.

In practice, many small sole traders with very low income might find that the trading allowance simplifies their reporting, but it won’t always be the best choice. If your actual business expenses are higher than the trading allowance, claiming actual expenses could reduce your taxable profit more, potentially keeping you under the personal allowance or reducing National Insurance. On the other hand, if you have very few expenses, the trading allowance can be a convenient simplification.

Allowable expenses: what counts and why it matters

To know whether you are under the personal allowance, you need a realistic profit calculation. That means understanding allowable expenses. Allowable expenses are costs that are wholly and exclusively for business purposes. Examples often include:

- Office costs (stationery, phone bills related to business, software subscriptions)

- Travel costs for business journeys (not ordinary commuting)

- Stock or materials used to produce goods

- Professional fees (accountancy, legal fees directly connected to the business)

- Advertising and marketing costs

- Insurance for the business

If you work from home, you may be able to claim a portion of household running costs or use a simplified flat-rate method, depending on your circumstances. If you use a vehicle for business, you may have choices about claiming actual costs or mileage-based simplified expenses.

Accurate expense recording can be the difference between being above or below the personal allowance. It’s also the difference between paying too much tax and paying the right amount. That said, you should only claim expenses you are entitled to claim. Inflating expenses or claiming personal costs as business costs can lead to problems if HMRC asks questions later.

What “earning under the personal allowance” looks like in examples

Examples can help illustrate the difference between turnover, profit, and total taxable income.

Example 1: Low profit, no other income
You have £9,000 turnover and £3,000 allowable expenses. Your profit is £6,000. You have no other income in the year. If your personal allowance is higher than £6,000, your Income Tax bill on that profit is likely zero. But you still need to consider National Insurance and whether you need to file.

Example 2: Low profit, part-time job
You have £5,000 profit from self-employment. You also have £11,000 from a job. Your combined income is £16,000. Depending on your personal allowance and any adjustments, you could owe Income Tax on the portion above the allowance. Your business profit might be taxed even though it is “only £5,000.”

Example 3: Under the allowance but with taxable benefits or other income
You have £8,000 profit, plus savings interest and a small private pension. Those extra sources can push your total taxable income above the allowance, leading to an Income Tax bill.

Example 4: Turnover under the allowance but profit higher than you think
You have £10,000 turnover and only £200 in expenses. Your profit is £9,800. That might still be under the personal allowance, but it’s much closer than you expected. If you also have other income, it could put you above the threshold.

What about “I only did it as a side hustle”?

Calling it a side hustle doesn’t change the tax treatment. If you are trading as a sole trader, HMRC looks at your profit, not the label you give it. A small Etsy shop, freelancing, gig work, selling digital products, tutoring, dog walking, content creation, and many other activities can still count as taxable trading income if they amount to a business.

Even if it’s irregular or part-time, the income may still be taxable, and you may still have reporting obligations. Some people assume that because they didn’t “set up a company,” it’s not official. Sole trader status doesn’t require incorporation; it’s essentially the default form of running a business as an individual.

So, the right question remains: what was your taxable profit for the year, and what was your total taxable income overall?

Do you pay tax on money you withdraw from the business?

No—at least not in the way many people fear. As a sole trader, the business and the individual are not separate legal entities for tax purposes in the same way a limited company is. You don’t pay tax because you “took money out.” You pay tax based on the profit the business made in the tax year.

This is why cashflow can catch sole traders off guard. You might withdraw most of the money you earn to live on, but you still need to set aside money for any tax and National Insurance due on the year’s profit. Even if you expect to be under the personal allowance, it’s still sensible to keep records and monitor profit so you don’t get a surprise bill later—especially if other income appears or if your profits grow.

Payments on account: could you be asked to pay in advance?

Payments on account are advance payments towards your next year’s tax bill, usually triggered when your tax and National Insurance bill exceeds a certain level and when your tax isn’t already mostly collected at source (such as through PAYE). If you’re well under the personal allowance and you owe little or nothing, payments on account may not apply.

However, it’s worth understanding them because they can shock people in their first year of paying tax. When payments on account do apply, the first bill can effectively include an amount for the year just ended plus an advance towards the next year, making it feel like you’re paying “double.” You’re not paying double tax on the same income; you’re paying part of next year’s bill early.

If your profits increase and you cross thresholds, payments on account can become relevant quickly. If your income falls, you can sometimes reduce payments on account, but you should do so carefully because underpaying can create interest charges.

What if you made a loss instead of a profit?

If your allowable business expenses are greater than your business income, you have made a loss. A loss generally means there is no Income Tax due on that business activity for the year, but the loss might be useful. In some circumstances, you may be able to carry the loss forward to offset against future profits, or claim it in other ways depending on the rules and your wider income situation.

Even if your business is tiny and you’re certain you won’t owe Income Tax, recording losses properly can matter. It may reduce future tax bills if your business becomes profitable later. But again, whether you must file depends on your overall situation and whether HMRC requires a return.

Record keeping: what you should track even when tax is likely zero

If you’re under the personal allowance, you might be tempted to keep minimal records. That can be a mistake. Good record keeping is not only about paying tax; it’s also about proving the figures are accurate if questioned and understanding your business performance.

At a minimum, you should keep:

- A record of sales/income (invoices, receipts, platform reports)

- A record of expenses (receipts, bills, bank statements)

- Notes about mixed-use items (for example, a phone used partly for business)

- Mileage logs if you claim vehicle mileage

- Dates and descriptions for anything unusual (refunds, one-off purchases, equipment)

Keeping business finances separate from personal spending can also reduce confusion. A dedicated bank account isn’t legally required for sole traders, but it can make your bookkeeping much easier.

When you might owe tax even if profits are low

There are a few scenarios where you could still end up with a bill even if your self-employed profit is under the personal allowance:

1) Other income uses up your allowance
Employment income, pensions, or rental income can consume your personal allowance, leaving your self-employment profit taxable.

2) You have taxable benefits or adjustments
Some benefits and charges can affect the overall calculation. Also, if you owe student loan repayments, those can be calculated through Self Assessment based on income thresholds that are separate from the personal allowance.

3) National Insurance applies
As discussed, National Insurance can be due even when Income Tax is zero.

4) Your profit calculation changes
If you forgot income, misclassified expenses, or later realise some expenses aren’t allowable, your profit may be higher than you thought, potentially crossing the personal allowance line.

5) HMRC changes your tax code or you have underpaid elsewhere
Sometimes underpayments from prior years or PAYE adjustments can create an amount due through Self Assessment, even if the business profit alone is low.

Do you need to pay tax if you only traded for part of the year?

The personal allowance usually applies to the whole tax year, not pro-rated just because you started mid-year. That means if you started trading halfway through the tax year, you still typically have the full personal allowance available for that year (subject to other income and specific circumstances).

So, if you made £6,000 profit in the last few months of the year and had no other income, you might still be under the personal allowance. But you would still need to consider whether you need to register and file, and whether National Insurance applies.

What if you’re paid cash or through online platforms?

How you are paid doesn’t change whether it is taxable. Cash payments, bank transfers, PayPal, Stripe, marketplace payouts, and platform payments are all forms of business income. The responsibility is on you to keep accurate records and declare the figures correctly.

Some people assume that income is only taxable if it appears on a formal payslip. That’s not correct. Business income is taxable when it arises from trading activity, regardless of the payment method. If you are under the personal allowance you may still owe nothing, but you should not rely on the payment method as a reason not to keep records or not to report when required.

VAT: separate from income tax and usually not triggered by low income

VAT is a different tax system with its own registration thresholds and rules. Most sole traders earning under the personal allowance are nowhere near VAT registration thresholds. But it’s still useful to understand that VAT is not based on profit and is not linked to the personal allowance. VAT is generally based on taxable turnover (sales), and registration is required when turnover passes a specific threshold in a defined period, or voluntarily if you choose.

For a small business under the personal allowance, VAT is often irrelevant, but the important point is that “under the personal allowance” doesn’t automatically mean “no other tax systems apply.” It just means your Income Tax may be zero, depending on your overall income picture.

What happens if you don’t file when you were supposed to?

If you were required to submit a tax return and you don’t, HMRC can charge penalties. These can apply even if your tax due would have been zero. Late filing penalties can start with an automatic fixed amount and then increase over time. In other words, the cost of ignoring paperwork can be far higher than any tax you would have paid.

If you’re unsure whether you need to submit a return, it’s better to check early rather than wait until deadlines have passed. If HMRC has issued you a notice to file, you should respond by filing (or by contacting them in the proper way if there’s an error), rather than assuming you can ignore it.

How to check if you’re under the personal allowance in a practical way

Here’s a practical approach you can follow:

Step 1: Calculate your business profit
Add up all your business income for the tax year. Then subtract allowable expenses. If you are considering using the trading allowance instead of actual expenses, compare both methods to see which produces the correct and most beneficial result for you.

Step 2: Add your other taxable income
Include employment income (from your P60 or payslips), pensions, rental profits, taxable benefits, dividends, and interest (where applicable). Make sure you’re using taxable figures, not just gross receipts, where the rules differ.

Step 3: Apply your personal allowance conceptually
Compare the total taxable income to the personal allowance figure for that tax year. If you’re below it, your Income Tax may be zero.

Step 4: Check National Insurance and other deductions
Even if Income Tax is zero, check whether self-employed National Insurance is due. Also consider student loan repayments if they apply to you, as those can be calculated separately.

Step 5: Confirm your filing obligations
If you have a notice to file or you meet criteria requiring Self Assessment, make sure you file on time.

Should you voluntarily pay National Insurance if profits are very low?

If your profits are very low, you might find that you are not required to pay certain National Insurance contributions. Sometimes, people choose to pay voluntary contributions to maintain their National Insurance record, which can affect eligibility for certain benefits and the State Pension. This is a personal decision that depends on your overall National Insurance history, your future plans, and your financial situation.

It’s worth understanding that “not required to pay” and “not beneficial to pay” are not the same thing. If you have gaps in your record, voluntary contributions may help. On the other hand, if you already have a strong contribution record through employment or other means, paying voluntarily may be unnecessary.

If you’re considering voluntary contributions, it can be helpful to review your National Insurance record and understand how many qualifying years you have and how many you need. That way, you can decide whether it’s worth paying anything when profits are low.

Common myths that trip up sole traders

Myth 1: “If I earn under the personal allowance, I don’t have to tell HMRC.”
Reality: You might still need to register or file depending on your circumstances and whether HMRC expects a return.

Myth 2: “I only pay tax if I withdraw money.”
Reality: As a sole trader, tax is based on profit, not withdrawals.

Myth 3: “Turnover under the personal allowance means no tax.”
Reality: Income Tax is on profit, and other income matters too.

Myth 4: “Cash payments don’t count.”
Reality: Payment method doesn’t change taxability.

Myth 5: “If I file, HMRC will definitely make me pay.”
Reality: Filing correctly can result in a zero bill if that’s what the numbers show. The point is accuracy and compliance, not automatically paying.

Planning tips to stay stress-free

Even if you expect to be under the personal allowance, a little planning helps avoid nasty surprises:

- Track profit monthly, not just turnover.

- Keep receipts and digital records as you go; don’t leave it all to the deadline.

- Set aside a small percentage of income anyway until you’re certain of the final position, especially if your profits are close to the allowance or you have other income.

- Learn the basic expense categories relevant to your line of work.

- Consider simple bookkeeping software or a spreadsheet so totals are easy to pull together.

If your business is growing, you may cross thresholds faster than expected. Having clean records makes it easier to adjust and meet deadlines.

So, do you need to pay tax if your sole trader business earns under the personal allowance?

If your total taxable income for the tax year (including your sole trader profit and any other income) is below your personal allowance, then you may have no Income Tax to pay. But that does not automatically mean you owe nothing at all, and it does not automatically mean you can ignore administration.

You still need to consider:

- Whether you have other income that uses up your personal allowance

- Whether you owe self-employed National Insurance contributions

- Whether you are required to register for Self Assessment or file a tax return

- Whether you have student loan repayments or other calculations triggered by income

The safest mindset is: “Under the personal allowance may mean no Income Tax, but I should still calculate profit properly and confirm filing and National Insurance obligations.” If you do that, you’ll avoid penalties, avoid overpaying, and build good habits for when your business grows beyond the allowance.

Final checklist

Before you conclude that you don’t need to pay anything, run through this checklist:

- I have calculated my business profit (income minus allowable expenses), not just turnover.

- I have included all other taxable income for the year.

- I have compared my total taxable income to the personal allowance for that tax year.

- I have checked whether National Insurance is due on my self-employed profits.

- I know whether I need to register for Self Assessment and/or file a tax return, especially if I have a notice to file.

If you can tick all of those off, you’ll have a reliable answer to the question—and confidence that “under the personal allowance” won’t come back to bite you later.