When do I need to start paying tax as a sole trader?

Understanding what “starting to pay tax” really means

As a sole trader, you don’t usually start paying tax the moment you make your first sale. What changes is that you become responsible for telling HM Revenue & Customs (HMRC) about your self-employed income, keeping adequate records, and paying any tax and National Insurance (NI) that ends up due. In other words, “when you need to start paying tax” is really a combination of (1) when you need to register, (2) when you need to file a tax return, and (3) when money actually leaves your account to settle what you owe.

That can feel confusing because employment tax is mostly automatic: your employer withholds tax through PAYE and you see your net pay. Sole traders operate differently. You typically receive income gross, calculate your taxable profit yourself, and then pay HMRC later on set dates. The timing depends on the tax year, your profit level, whether you also have other income, and whether you cross thresholds for National Insurance or VAT.

This article walks you through the practical answer: what triggers tax obligations, what you must do after you start trading, how to work out whether you’ll owe anything, and when payments are due. It also covers the common “gotchas” (like taking cash payments, running side gigs alongside a job, and the first-year shock of payments on account), so you can plan your cash flow instead of being surprised.

What counts as “starting as a sole trader”?

In everyday terms, you “start” as a sole trader when you begin trading with the intention of making a profit. That can include things like launching a freelance service, selling products online, doing paid gigs, providing consultancy, tutoring, rideshare driving, creating digital products, or any activity that looks like a business rather than a one-off hobby.

There’s no single magic moment that HMRC uses for everyone, but a good practical test is: have you started to market your service, take paying customers, invoice, or incur costs with the intention of generating income? If you’re doing any of those, you’re likely trading. If you’re only experimenting without taking money or operating like a business, you may not be trading yet.

Why does this matter? Because your obligations (registration, record-keeping, and tax return filing) are tied to trading. You can’t decide later that you “didn’t really start” if you were clearly trading and receiving income.

You pay tax on profit, not turnover

A core point that saves a lot of stress: as a sole trader, income tax is charged on your taxable profit, not your total sales. Profit is broadly your business income minus allowable business expenses for the tax year. If you have a quiet year, high start-up costs, or you reinvest heavily, your profit may be low or even negative, meaning there may be little or no tax to pay (and you might have a loss to claim).

Turnover (your total sales) still matters for some thresholds, most notably VAT registration, but for income tax purposes the key number is profit. Many new sole traders assume they’ll owe tax the moment money hits their account; the truth is you only owe income tax and most NI because of the profits you generate over the tax year.

This is also why tracking expenses is not just admin: it’s the difference between paying tax on an inflated number and paying the right amount. Good record-keeping reduces your tax bill by ensuring you claim the costs you’re entitled to claim.

The personal allowance: the first big “do I owe tax?” threshold

Most people have a personal allowance for income tax. If your total taxable income for the year is below your personal allowance, you may not pay income tax. As a sole trader, your “total taxable income” can include self-employed profit plus other income such as wages, rental income, dividends, savings interest, and so on.

So if your self-employed profits are small and you have no other income, you may not owe income tax. But you might still have to register and file a tax return depending on your circumstances, and you might still owe National Insurance if you pass the relevant thresholds.

It’s also important to understand that the personal allowance can be reduced in some circumstances (for example, if your income is high). For many first-time sole traders, that won’t apply, but it’s a reminder that your overall income picture matters, not just your business.

National Insurance: when NI starts and why it’s separate

Sole traders can pay National Insurance based on their profits. NI is related to state benefits and your state pension record, but practically it’s another amount you may need to pay alongside income tax.

The exact NI rules can change over time, and the structure has changed in recent years, but the key idea remains: once your profits exceed certain thresholds, NI becomes payable. Some NI can be collected through your Self Assessment bill. Even if your profits are below the threshold, you may be able to choose to pay voluntary contributions to protect your entitlement to certain benefits, depending on your situation.

When people ask “when do I start paying tax?”, they often mean “when do I start sending money to HMRC?” That typically includes both income tax and NI, calculated together on your tax return.

Registering as self-employed: the first administrative trigger

For many sole traders, the first formal step is registering for Self Assessment and telling HMRC you are self-employed. Registration doesn’t mean you automatically owe tax right away; it means HMRC knows you have self-employed income and expects a tax return when appropriate.

In practice, you should register when you start trading, not years later. Registering promptly makes it easier to keep your records straight and reduces the risk of missing deadlines. It also ensures you receive a Unique Taxpayer Reference (UTR), which you’ll need for filing.

If you’re unsure whether your activity counts as a business, you can still prepare as if it does: keep records, track income and expenses, and set aside money. If it turns out you don’t need to register, you’re still in a better position than if you ignored everything and later discover you did need to register.

Self Assessment deadlines: when filing and paying actually happen

The UK tax year runs from 6 April to 5 April the following year. Sole traders report their profits for that tax year through Self Assessment. The deadlines matter because they determine when you file and when you pay.

Although the details can vary depending on how you file, a common pattern is:

1) You trade during the tax year (6 April to 5 April).

2) After the tax year ends, you prepare your accounts (income and expenses) and submit your Self Assessment tax return.

3) You pay the tax bill by the payment deadline, which is typically after the end of the tax year.

This means there can be a long gap between earning money and paying tax on it. That gap is helpful for cash flow, but it creates a risk: if you don’t save for the tax bill, you can end up scrambling when the deadline arrives.

The “first tax bill shock”: payments on account

One of the biggest surprises for new sole traders is “payments on account.” In many cases, once your Self Assessment bill is above a certain amount, HMRC may ask you to pay your next year’s tax in advance, in two instalments. These are called payments on account.

This can make your first payment feel enormous because you may be paying:

• The tax you owe for the year you just reported, plus

• A first instalment toward the next year, and then

• Another instalment later in the year

It’s not that you’re being taxed twice; it’s that part of what you’re paying is a prepayment of the next year’s bill. If your profits later turn out to be lower, you can potentially reduce payments on account. But if your profits rise, you may owe a “balancing payment” on top.

Planning for this from day one is smart. Many sole traders set aside a percentage of each payment they receive (often into a separate savings account) so the tax bill doesn’t derail them.

So, when do you actually start paying income tax as a sole trader?

You start paying income tax when your total taxable income exceeds your personal allowance and you have a Self Assessment bill due. That normally occurs after you’ve completed a tax return for a tax year in which your profits were high enough to create a tax liability.

Practically, the sequence looks like this:

• You begin trading and earning income.

• You keep records of income and allowable expenses.

• At the end of the tax year, you calculate your profit.

• You file a tax return showing that profit (and other income if relevant).

• If the calculation shows you owe tax, you pay it by the relevant payment deadline.

So, for most new sole traders, “starting to pay” tax is not immediate. It starts when the reporting cycle catches up and a payment becomes due.

Do you need to pay tax if you have a job as well?

Yes, you can owe tax as a sole trader even if you already pay tax through PAYE at a job. When you have both employment income and self-employed profit, HMRC looks at your total income. Your personal allowance is shared across your income sources, and your tax bands apply to the combined total.

This is a common scenario: you start a side business while employed, and you assume your PAYE covers everything. PAYE covers tax on your salary, not on your freelance profit. The freelance profit is usually handled through Self Assessment.

The good news is that having PAYE income doesn’t automatically make the self-employed side complicated; it just means you must include both income sources on the tax return. It also means your side-business profit may be taxed at a higher rate if your salary already uses up the lower bands.

What if you only earn a small amount from self-employment?

If your self-employed income is small, there are still two questions: do you need to report it, and will you owe anything?

In some cases, small amounts of trading income may fall under a trading allowance or may not create tax due if your total income stays within your personal allowance. But you should not assume that “small” means “no obligations.” Your obligation to register and file can depend on your total income and HMRC’s rules for that year.

A sensible approach is:

• Keep records anyway, even for small amounts.

• Track your profit, not just income.

• If your income starts to look regular, business-like, or growing, treat it as a business early rather than trying to tidy it up later.

Even where no tax is ultimately due, being organized puts you in control and reduces anxiety if HMRC ever asks questions.

Record keeping: what you need from day one

If you want to avoid panic later, start keeping records immediately. You don’t need a complicated system. You do need something consistent that captures:

• Dates and amounts of all income (sales, invoices, fees, tips, platform payouts)

• Business expenses, with evidence (receipts, invoices, statements)

• Bank transactions (many sole traders find a separate bank account helpful)

• Mileage logs if you use a vehicle for business

• Notes on anything that’s partly personal and partly business, so you can justify the business proportion

Good records help you calculate profit accurately, claim expenses correctly, and respond confidently to any HMRC query. They also help with everyday decisions like pricing, knowing whether you can afford equipment, and seeing which services are most profitable.

Allowable expenses: why they affect when you “start paying”

Allowable expenses reduce your taxable profit, which can delay or reduce the point at which you owe tax. If you’re new to self-employment, it’s easy to miss expenses, especially small recurring ones. Common categories include:

• Office costs (stationery, postage, printer ink)

• Phone and internet (business proportion)

• Software subscriptions and online tools

• Marketing (ads, website hosting, domain, design work)

• Travel costs related to business

• Professional fees (accountant, legal, industry memberships)

• Training that maintains or improves existing skills (not always new skills)

• Insurance relevant to the business

• Use of home as office (simplified or actual cost methods may apply)

Each expense needs to be “wholly and exclusively” for business, or you need to apportion it fairly if it’s mixed use. This is one reason it’s worth understanding the basics early: if you’re consistently missing expenses, you may think you “started paying tax” sooner than you should have, simply because your reported profit is too high.

Setting aside money: a practical rule that prevents headaches

Because tax is paid later, the key skill for a sole trader is setting money aside as you go. A simple habit is to move a percentage of each payment into a dedicated tax savings pot. The right percentage depends on your total income and tax band, but many people choose a conservative rate to avoid being short.

Why does this matter to the question “when do I need to start paying tax?” Because the real risk is not the date you start owing tax; it’s being unprepared when the payment deadline arrives. If you treat every sale as partly HMRC’s money, you remove the sting from your first bill.

If your income is irregular, you can also smooth it: put aside more during strong months to cover weaker months. The goal is to make your tax payment feel like a routine transfer rather than a crisis.

VAT: a different “start paying tax” moment

VAT is separate from income tax. You can be under the income tax thresholds and still need to think about VAT if your turnover grows. VAT is based on taxable turnover, not profit. That’s why it can catch people out: a business with slim margins can hit the VAT threshold and have to register even though profits are modest.

VAT also changes how you price and invoice. Some customers can reclaim VAT and don’t mind it; others can’t reclaim it and will feel the price increase. If you’re close to the VAT threshold, it’s worth monitoring monthly turnover so you can plan rather than rush a registration.

Not every sole trader will ever register for VAT, but if you scale quickly or operate in a high-turnover sector, VAT can become the first tax you “start paying” in a very visible way, because it affects your invoices and cash flow.

What if you make a loss in your first year?

Many new sole traders make a loss initially because of start-up costs, slow customer acquisition, or investment in equipment. If you make a trading loss, you typically won’t pay income tax on that business for that year because there is no profit to tax. You may be able to carry the loss forward to set against future profits, or in some cases set it against other income, depending on the rules and your circumstances.

This is another reason not to equate “earning money” with “owing tax.” A loss year may still require reporting, but it doesn’t create a tax payment in the same way a profitable year does.

Losses are also information: they tell you what it costs to run your business and how much revenue you need to be sustainably profitable. Recording them properly is part of building a business, not a sign you’ve failed.

How your first year timeline usually works

Let’s translate all of this into a simple timeline you can picture. Imagine you start trading at some point during a tax year. You earn income and incur expenses. You keep records. The tax year ends on 5 April. After that, you file a tax return for the year that just ended. Then you pay the bill by the payment deadline.

That means your first payment often happens many months after you started. For some people, that delay makes the first bill feel disconnected from the trading activity that created it. That’s why saving as you go is critical: you want your business to feel stable when the bill arrives.

Also remember that the first year might include payments on account. If that happens, your first payment isn’t just “catching up.” It’s also “paying forward.” Understanding that early helps you avoid feeling like something is wrong.

Do you need an accountant to know when you start paying?

You don’t need an accountant to understand the basic triggers: profit, personal allowance, Self Assessment deadlines, and (possibly) VAT. Many sole traders handle their first year themselves using bookkeeping software or spreadsheets and then decide later whether to get professional help.

However, an accountant can be valuable if:

• You have multiple income sources (job, rental, dividends, self-employment)

• Your expenses are complex or involve assets and depreciation rules

• You’re unsure about what’s allowable or how to apportion mixed costs

• Your profits are rising and you want tax planning advice

• You want reassurance and time back

Even if you don’t hire one full-time, a one-off consultation can help you set up a solid system and avoid mistakes that cost more later.

Common mistakes that make people pay tax earlier than necessary

Sometimes people feel they “started paying tax too soon” because of avoidable errors. Here are some frequent ones:

Not tracking expenses properly. If you forget allowable costs, your reported profit is higher than reality, and so is your tax bill.

Mixing personal and business spending without notes. If you can’t clearly identify business costs, you may avoid claiming them out of caution.

Not understanding the difference between drawings and expenses. Money you take out of the business for yourself is not a business expense; it doesn’t reduce profit for tax. It’s simply you taking profit out.

Ignoring small income streams. Platform payouts, cash payments, tips, and side gigs can add up. Missing them can create filing problems later.

Being surprised by payments on account. This is one of the biggest reasons new sole traders feel blindsided.

Most of these are solved by simple routines: capture transactions weekly, keep receipts (even digital photos), and review your numbers monthly.

Practical checklist: what to do when you start trading

If you want a straightforward answer to “when do I need to start paying tax,” this checklist is the best way to turn the rules into action:

1) Start record keeping immediately. Track every sale and every expense from day one.

2) Register appropriately. If you’re trading, don’t leave registration until the last minute.

3) Save for tax as you go. Put aside a percentage of income into a separate pot.

4) Monitor profit, not just cash. Cash flow tells you what you can pay today; profit determines your tax position.

5) Watch your turnover for VAT. If you grow quickly, VAT can become relevant even when income tax feels manageable.

6) Learn the payment dates. Put reminders in your calendar so deadlines don’t sneak up on you.

7) Don’t ignore letters from HMRC. Even if you’re busy, deal with them promptly.

8) Review after your first return. Once you’ve filed once, you’ll have a clearer sense of what percentage to save and whether you need an accountant.

How to estimate whether you’ll owe tax before the year ends

You don’t have to wait until the end of the tax year to know roughly where you stand. A simple approach is to estimate your annual profit and compare it to your allowances and other income. Here’s a practical method:

• Add up your business income year-to-date.

• Add up your allowable expenses year-to-date.

• Subtract expenses from income to get profit so far.

• If your business is seasonal, adjust for expected changes in the coming months.

• Add your other income (like salary) and consider how much of your personal allowance and tax bands are already used.

This won’t be perfect, but it gives you a planning figure. If you’re consistently profitable, you can set aside money with confidence. If your income is growing quickly, you can increase your savings rate so you’re not caught short later.

What happens if you miss the point when you should have registered or filed?

Life happens: people start trading as a side hustle, forget about it, and then realize later they should have told HMRC. If you’re in that situation, the important thing is not to bury your head. The sooner you address it, the easier it usually is to sort out. Late registration or late filing can lead to penalties and interest, but voluntarily putting things right can help you limit the damage.

If you think you’ve missed a deadline, gather your records, estimate your profit, and get help if needed. Many issues are solvable, and the stress of not dealing with it is often worse than the reality of the bill.

When do you need to start paying tax? A simple summary

You need to start paying tax as a sole trader when your profits (combined with any other taxable income) are high enough to create a tax liability, and your Self Assessment bill becomes due after you file your return. That payment usually happens after the tax year ends, not at the moment you start earning. The best way to stay safe is to register when you start trading, keep good records, claim allowable expenses, and set aside money from each payment so your first tax bill is just another planned business cost.

If you keep those principles in mind, the question stops being scary. You’ll know that tax is tied to profits, you’ll understand the timeline, and you’ll be prepared for the first payment and any payments on account. Most importantly, you’ll be running your business with clarity: you’ll know what you earn, what you spend, what you keep, and what you owe—before the deadlines force you to find out the hard way.