Prop Trading vs Self Employed Trading in the UK
The choice between prop trading and self-employed retail trading in the UK is no longer just about strategy, it’s about how you are viewed by the taxman. To be clear: prop trading is essentially a service-provider role, while self-employed trading is typically viewed as personal investing or a sole-trade business. In prop trading, you trade the firm’s capital (or a simulation of it) for a performance fee, which HMRC taxes as income tax. In self-employed retail trading, you risk your own money, and depending on your volume, your profits are either subject to capital gains tax or, in the case of spread betting, remain entirely tax-free.
The Fundamental Split: Risk and Ownership
The most visible difference is whose “skin” is in the game.
Self-Employed (Retail) Trading: You are the captain of your own ship. You deposit your own savings into a brokerage account. If the market moves against you, that money is gone. However, because you own the capital, you also own 100% of the profits. In the UK, if you are spread betting, these profits are currently exempt from capital gains tax (CGT) and income tax. If you are trading CFDs or shares, you fall under the CGT regime, which allows for an annual tax-free allowance (£3,000 in 2026).
Prop Trading: You are more like a high-level contractor. You pay an evaluation fee to prove your skills. Once “funded,” you trade the firm’s resources. You don’t own the account; you own a contract that says you get a cut (usually 70% to 90%) of the gains you generate. Because you aren’t risking your own capital to make the trades, HMRC doesn’t see this as “investing.” They see it as a professional service you are providing to the firm.
Tax Treatment: Income vs. Gains
The 2026 tax year has brought significant clarity, and some sting, to how these two paths are handled by HMRC.
- Prop Trading Profits: These are classified as miscellaneous income or self-employment income. You must report them via self-assessment. You will pay income tax at your marginal rate (20%, 40%, or 45%) plus Class 4 National Insurance.
- Retail Trading Profits: These are typically handled via the capital gains regime. While the CGT allowance is smaller than it used to be, the rates (generally 10% or 20% for basic and higher rate taxpayers) are often lower than income tax rates.
The “Making Tax Digital” (MTD) Factor
A major shift hitting the UK in April 2026 is the rollout of Making Tax Digital for income tax. This specifically targets self-employed individuals and landlords with a qualifying income over £50,000.
If you are a successful prop trader pulling in more than £50,000 a year, you can no longer simply file once a year in January. You are now required to keep digital records and send quarterly updates to HMRC. Retail traders who fall strictly under the capital gains or spread betting exemptions generally avoid this specific administrative hurdle, as MTD currently focuses on “trading and property income.”
Conclusion – Prop Trading vs Self Employed Trading in the UK
Choosing between prop trading and self-employed retail trading in 2026 is a balance of leverage versus taxes. Prop trading allows you to control massive accounts for a small fee, but you’ll pay a higher percentage of your “salary” to HMRC. Retail trading offers the potential for tax-free growth (via spread betting) or lower CGT rates, but your growth is limited by how much cash you can personally put into the account. Most professional UK traders now use a hybrid approach: using prop firms to build a “war chest,” which they then move into a personal, tax-efficient retail account.
FAQ – Prop Trading vs Self Employed Trading in the UK
1. Can I claim my prop firm evaluation fees as a business expense?
Yes. Since prop trading is taxed as a business/self-employment, you can generally deduct “wholly and exclusively” incurred costs. This includes failed challenge fees, platform subscriptions, and even a portion of your home office costs.
2. Does the trading allowance apply to both?
The £1,000 tax-free trading allowance can apply to prop trading income if it is your only self-employment income. However, once you earn over £1,000, you must register for Self-Assessment and choose between the £1,000 flat deduction or your actual expenses.
3. Is prop trading more “legal” than retail trading in the UK?
Both are perfectly legal. The difference is regulatory. Retail brokers are heavily regulated by the FCA to protect your deposits. Prop firms are currently less regulated because they aren’t holding your “deposits”, you are paying for a service. This makes choosing a reputable firm with a strong payout history essential.
Disclaimer: We are not tax advisers or accountants. UK tax laws are changing rapidly in 2026. This article is for general info only. Please speak with a UK-certified accountant to make sure your specific setup is compliant.
We have helped thousands of traders reach funding at TTT Markets from account sizes of $5k upwards to $500k. Check out our programs.
Additional resources:
The UK Prop Trading Scene: A Guide to Profits, Risks, and Regulation
