How to pay tax as a sole trader: everything you need to know

If you’re a sole trader, then you’re not employed by an employer, which means you don’t receive a traditional salary, instead you pay yourself from your earnings. As a result, your tax isn’t automatically deducted, which means you need to register and pay tax on your earnings. 

How do I register for tax as a sole trader?

To register as a sole trader, you need to tell HMRC that you pay taxes through self-assessment and file a tax return every year. You can register for self-assessment on the GOV.UK website, the form is easy to fill in and can either be done online or by post. Once you’ve completed the registration process, HMRC will send you a 10-digit Unique Taxpayer Reference and an activation code for your online account. You can now log into your online account and complete your annual self-assessment tax return in order to calculate how much tax you owe.

Steps to set up as a sole trader 

There are several steps you should take before officially registering as a sole trader:

  1. Decide on your business name — whilst you don’t need to register your business name, it helps when invoicing to have a name whether it’s simply your name or something else. Just make sure you don’t include terms like: ‘limited’, ‘Ltd’ or ‘plc’ as you’re a sole trader, not a limited company.
  2. Understand your responsibilities — as you’re liable for paying your own tax, you need to keep business records and records of expenses. You must also register for VAT if your turnover is over £85,000.
  3. Register for self-assessment — as explained above, you’ll need to then register for self-assessment and file a tax return every year, with the deadline being 31st January.

How do I pay my tax as a sole trader?

After submitting your self-assessment, HMRC will calculate how much tax you owe. This will be added to your Government Gateway account, meaning you can simply log in and pay online. The deadline for paying is 31st January, but you’re free to fill out your self-assessment as soon as the tax year ends in April. The tax you owe will be the final amount for the previous tax year, so if you file on 31st January 2023, it’ll be for the last full tax year (2021/22).

Sole traders whose tax bill is more than £1,000 for the year, must usually pay twice a year, once on 31st January and the second by 31st July. The payment on 31st January is the balancing payment for the tax year, plus the first advance payment towards your next tax bill. The payment on 31st July is the second advance payment towards your next tax bill. 

How much tax do I pay as a sole trader?

How much tax you pay depends on what you earn as a sole trader. As with full-time employees, sole traders are given an annual personal allowance, which is tax-free earnings. For the 2022/2023 tax year, this is £12,570. Therefore, anything earnt over £12,570 will be taxed. However, if you earn over £125,140, you won’t receive a personal allowance.

Sole traders will fill out a self-assessment to determine how much income tax they owe. This depends on your income:

Tax bandTaxable incomeTax rate
Basic rate£12,571 – £50,00020%
Higher rate£50,001 – £150,00040%
Additional rateOver £150,00045%

It’s a good idea to set aside a percentage of your earnings each month in order to afford the tax bill at the end of the year. By using the above tax rates, you can determine how much to set aside depending on your earnings

Sole traders also need to pay National Insurance Contributions (NICs), these fall into two different classes:

  • Class 2 NICs — for annual profits over £11,908 a year – pay £3.15 a week (or you can elect to pay voluntary class 2 NICs if your annual profits do not exceed £11,908)
  • Class 4 NICs — for annual profits £11,909 or more a year – pay 9.73% on profits between £11,909 and £50,270 then 2.73% on profits over £50,270

You’ll only have to pay VAT if your business has an annual turnover of £85,000 or more. If your income exceeds this, you’ll need to charge VAT on your sales. Speak to our vat accountants today!

What expenses can you claim back as a sole trader?

When filling out your self-assessment tax return, there’ll be a section on expenses. You won’t be taxed on expenses you need to keep your business running. This could include equipment, WiFi, heating, lighting, transport and more. Of course, you can only claim expenses related to your business and if you claim heating, for example, you can only claim during working hours. 

How are my earnings reported as a sole trader?

You report your earnings to HMRC via your self-assessment tax return. HMRC will then calculate your income tax and NICs. If you don’t report your earnings and miss the self-assessment deadline of January 31st, HMRC will fine you, with penalties starting from £100.

What if I have earnings from other employment?

You’ll still need to register and pay taxes as a sole trader even if you have another job. On your self-assessment tax return, you’ll be asked about other employment, how much you’ve earnt and what tax you’ve paid already. For example, if you have a part-time job on payroll, you’ll be able to use the information from your P60 to fill in how much you’ve earned during the tax year and what tax/NI you’ve paid. 

This will help HMRC calculate how much income tax you owe on your self-employment earnings. 

Do sole traders pay corporation tax?

Every UK limited company is subject to corporation tax. However, if you operate as a sole trader, you aren’t required to pay corporation tax, making your accounting much simpler. 

Do I have to do a tax return as a sole trader?

Yes, if you’re registered as a sole trader, you need to fill out a tax return every year to inform HMRC of your earnings and pay any tax due. 

How can Rayner Essex help?

Completing your tax return as a sole trader can sometimes be overwhelming. Whether you need advice on what records to keep, help with your self-assessment, support with setting up your business or something else, our team of tax experts at Rayner Essex are here to help with our personal tax service. We take the time to understand your business and personal tax needs, providing advice to help you save money and time. 

Get in touch 

If you’re looking for some personal tax advice or support for completing your self-assessment, our tax experts can assist, so please don’t hesitate to contact us today.

Photo by Clay Banks on Unsplash

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