In simple terms...
Thinking about becoming a sole trader or already running your own business?
Don't worry, we've got you!
Understanding how much tax you'll need to pay is key to avoid surprises when your tax bill arrives. Unlike employees, who have taxes automatically deducted from their wages, sole traders are responsible for working out and paying their own tax through Self-Assessment.
In this guide, we’ll explain how the sole trader tax rate works, what National Insurance contributions you'll need to pay, how to calculate your total tax bill and tips to manage your Self Assessment tax return.
By the end, you'll have a clear understanding of what to expect when paying tax as a sole trader and how to stay on top of it! Ready? Let's get into it!
How Sole Trader Tax Works
Being self-employed comes with a big perk: you only pay tax on your business profits, not your total income! That means you can deduct allowable business expenses before working out how much you owe.
How much tax you pay depends on a few key things: The calculations are based on the tax year, which runs from April 6th to April 5th of the following year.
Income Tax rates – Calculated based on your taxable profits.
National Insurance Contributions (NICs) – Sole traders pay Class 2 and Class 4 NICs.
Personal Allowance – The first £12,570 you earn is tax-free!
Unlike limited companies, sole traders don’t pay Corporation Tax, but that doesn’t mean you’re off the hook. Keeping on top of tax deadlines and tracking your finances throughout the year is key.
Using a tool like our free Pie Tax app can make things easier, helping you stay organised and avoid any last-minute tax headaches!
The Sole Trader Tax Rate Breakdown
Let’s talk tax! As a sole trader, your Income Tax depends on how much profit you make, and luckily, you don’t pay tax on every penny you earn. Thanks to the Personal Allowance, a chunk of your income is tax-free before HMRC takes a cut. Here’s how it works:
£0 - £12,570 → 0% Tax (Personal Allowance) – No tax paid!
£12,571 - £50,270 → 20% Tax (Basic Rate) – The standard rate most sole traders fall into.
£50,271 - £125,140 → 40% Tax (Higher Rate) – More earnings mean a bigger slice goes to HMRC.
£125,141+ → 45% Tax (Additional Rate) – The highest tax bracket for top earners.
One thing to watch out for: If you earn over £100,000, your Personal Allowance starts to shrink. For every £2 earned above this, you lose £1 of your tax-free allowance. That means by £125,140, it’s gone completely.
Understanding these tax bands helps you plan ahead and avoid any nasty surprises. Knowing what’s coming means you can set aside the right amount throughout the year, so no more tax bill shocks in January!
National Insurance Contributions for Sole Traders
Sorry to break it to you, but paying National Insurance Contributions (NICs) as a sole trader is part of running your business. It helps fund things like the State Pension and NHS services. But don’t worry, it’s not as complicated as it sounds!
You’ll pay two types of NICs:
Class 2 NICs – A small flat fee of £3.45 per week, but only if your profits are over £6,725 a year.
Class 4 NICs – This is based on your profits:
9% on profits between £12,570 and £50,270.
2% on anything over £50,270.
If you’re new to this, NICs can easily catch you off guard, especially when tax season rolls around.
That’s why using our Pie Tax app can be a game-changer. It tracks your profits and tax obligations automatically, so you’re never left guessing how much you owe!
How to Calculate & Pay Your Sole Trader Tax Bill
Sorting out your tax bill is easier than it seems! Just follow these three easy steps:
Step 1: Work Out Your Taxable Profit
Add up all business income (invoices, sales, etc.).
Subtract allowable expenses like travel, office costs, and equipment.
Step 2: Apply the Tax Rates
Deduct the £12,570 Personal Allowance (if eligible).
Pay 20% tax on profits between £12,571–£50,270, 40% on £50,271–£125,140, and 45% above that.
Don’t forget National Insurance Contributions (NICs)! Class 2 and Class 4 apply based on your profits.
Step 3: File & Pay Your Tax Bill
Submit your Self-Assessment tax return by 31 January each year.
Pay any tax owed by 31 January (plus an extra ‘payment on account’ by 31 July if required).
Common Tax Mistakes to Avoid
Nobody wants a surprise tax bill or a fine from HMRC, but it happens more often than you’d think! Here are the biggest mistakes sole traders make, and most importantly, how to dodge them.
Missing the deadline – HMRC doesn’t mess around. File late, and you’ll get an instant £100 fine (and it only gets worse from there!).
Not tracking expenses – Every business cost you forget to claim means paying more tax than you should. Keep those receipts!
Forgetting extra income – Got rental income, side gigs, or bank interest? HMRC wants to know about everything taxable, not just your main business earnings.
Underestimating your tax bill – Avoid the January panic! Set aside 20-30% of your profits throughout the year so your tax bill doesn’t catch you off guard.
Stay organised, plan ahead, and you’ll breeze through tax season with no nasty surprises!
Tax Tips for Sole Traders
Want to avoid last-minute panic when tax season rolls around? Staying ahead of the game can save you stress (and money!). Here’s how to keep things simple:
Keep digital records – Ditch the paper receipts! Using bookkeeping software makes tracking income and expenses effortless.
Set aside tax money – No one likes a surprise tax bill. Stashing 20-30% of your profits in a separate account can keep you from scrambling in January.
Claim tax-deductible expenses – Travel, office supplies, phone bills: if it’s a business cost, it could reduce your taxable income. Don’t miss out!
Submit your return early – The sooner you file, the less stress you’ll have (plus, no risk of HMRC fines!).
A little preparation goes a long way when it comes to tax! For full details on sole trader taxes, check out HMRC’s guide here.
Paying into a Pension
Let’s face it, pensions aren’t the most exciting topic! But as a sole trader, planning for retirement is a smart financial move.
Unlike employees, you don’t get a workplace pension, so it’s up to you to build your own. The good news? Pension contributions are tax-deductible, meaning you get 20% tax relief at the basic rate. So, if you put in £100, it only costs you £80, with the government adding the extra £20.
There’s no rule saying you have to contribute, but it’s worth thinking about. You can put in up to £40,000 a year, and if you’ve not used your full allowance in the last three years, you can carry it forward.
Bottom line? You’re saving for the future while reducing your tax bill today. Even small contributions can make a big difference over time. Your future self will thank you!
Final Thoughts
So, now you know that taxes as a sole trader don’t have to be a nightmare!
You’ll need to pay Income Tax and National Insurance on your business profits, but with the right approach, you can avoid last-minute stress and unexpected tax bills.
Keep track of earnings, claim every allowable expense, and set aside money regularly, so there are no nasty surprises when it's time to pay up.
Staying organised is the secret to stress-free Self-Assessment. The easiest way? Ditch the spreadsheets and let Pie Tax do the heavy lifting! Our free app tracks your income and expenses automatically, so you’re not digging through a mountain of receipts in January.
A happy tax season awaits!
