Sole Trader Tax: Work Out What You Need to Pay

How Much Tax To Pay as a Sole Trader

If you are considering becoming a sole trader you must be aware of the tax implications.  As a sole trader it is your responsibility to manage your own tax and declare/pay this to HMRC by 31 January each year.

How to Work Out How Much Tax You Must Pay

The tax you pay is based on the income you make from your business.  Confusingly, income actually means profit – all the money you make less all the costs you have incurred.  So, for example, if you are a freelance bookkeeper your income would be the money your clients pay you for maintaining their books less anything you have paid for like travel to their offices or accounting software subscriptions – the difference between these is your profit and this is the figure your tax will be based on.

Income tax is calculated at different rates according to how much your profits are.  So for 2017/2018 the rates are:

Personal Allowance Up to £11,500 0%
Basic rate £11,501 to £45,000 20%
Higher rate £45,001 to £150,000 40%
Additional rate over £150,000 45%

Note – if you have multiple sources of income, such as a part time job then make sure you include this as part of your income when working out how much tax you have to pay and the rate.

What Other Tax Must a Sole Trader Pay?

As a sole trader you may need to pay Class 2 and Class 4 National Insurance.  The amount of Class 4 National Insurance you pay is based on your profits as a sole trader.  The current rates are:

Class Rate for tax year 2017 to 2018
Class 2 £2.85 a week
Class 4 9% on profits between £8,164 and £45,000
2% on profits over £45,000

What is Class 2 National Insurance?

What is Class 4 National Insurance?

When Does a Sole Trader Need to Pay Tax and National Insurance to HMRC?

As a Sole Trader you need to declare your earnings by submitting a Personal Tax Return under Self Assessment rules and pay any tax and NI over to HMRC by 31 January each year, along with the return detailing your earnings.

The return submitted by 31 January covers the previous tax year.  So for example, your tax return due on 31 January 2018 covers the tax year 6 April 2016 to 5 April 2017.

HMRC Payments on Account 

You should also be aware that you will probably need to make a payment on account by the 31 July each year which is a contribution towards your upcoming 31 January tax bill.  The amount you pay is 50% of your previous tax years TOTAL tax & national insurance bill. Find out more here.

Whether you are already a sole trader or if you are considering becoming a sole trader it is important to budget for your tax and national insurance, one of the simplest ways is to set some money aside for HMRC as you get paid. If you are unsure how much tax you need to pay or of your tax status we definitely recommend you ask an accountant.

My Top Tips to Budget for Your Tax Bill