The simplicity of running a business this way means it’s no surprise that setting up as a sole trader is one of the most popular business structures in the UK. But where do sole traders stand when it comes to paying taxes?
We’ll take a look at what you need to pay as a sole trader and what deadlines you need to keep track of.
What is a sole trader?
In simple terms, a sole trader is a self-employed individual who is the ‘sole’ owner of their business. There’s no legal distinction between you and the business, so if you’re a sole trader, you are your business. You get to call all the shots, keep your profits (after tax), and have complete autonomy when it comes to each and every business decision.
The flipside of there being no legal separation means that if your business incurs any debts, HMRC will see them as your debts, so your assets might not be protected if things go wrong. This is different from the likes of limited companies which are seen as separate entities from their owners.
As part of your decision-making process, it can help to assess whether or not your business is ‘high risk’. For example, if you deal with the public a lot, or handle large transactions, then there might be more risk to the business (so you might consider starting a limited company instead).
Most of all – you’re in control! You can always change your structure from sole trader to limited company at a later date if this is more appropriate as you grow.
When do I need to register as a sole trader?
The deadline to register as a sole trader is 5th October following the end of the tax year that you need to report self-employed income for.
For example
If you need to submit a tax return for the 2023/24 tax year (6th April 2023 – 5th April 2024) you’ll need to register for Self Assessment before 5th October 2024.
It’s best practice to register as soon as possible anyway, to ensure you stay one step ahead. After all, registering doesn’t mean you have to pay taxes straight away!
Thanks to the tax-free trading allowance you can earn up to £1,000 of self-employed income before you need to register as a sole trader. Sometimes also known as the hobby allowance, it applies to the total income you receive from self-employed activities in a tax year, which runs from 6th April to 5th April the following year.
For example, if your sole trader business only makes £900 each tax year, you won’t need to register. Good news for your side hustle!
What taxes do sole traders pay?
As a sole trader, you’ll pay income tax on any profits you make. The word ‘profits’ is an important one, because this is different to paying tax on the full amount of self-employed income that you make. Instead, you can either choose to offset the £1,000 trading allowance against your earnings, or you can claim tax relief on your business expenses.
You’ll also need to make Class 2 and Class 4 National Insurance contributions if your earnings are above the NI threshold.
The current income tax bands for 2023/24 and 2024/25 are shown in the table below (although tax brackets will be different if you live in Scotland). You’ll only pay the tax rate that applies to the part of your earnings that fall into that particular tax bracket.
| Band | Income | Tax Rate |
| Personal Allowance | £12,570 and below | 0% |
| Basic rate | £12,571 – £50,270 | 20% |
| Higher rate | £50,271 – £125,140 | 40% |
| Additional rate | £125,140 and over | 45% |
It’s a good idea to put money aside throughout the year, so you’re prepared when it’s time to pay your tax bill. If you need any help with how much you need to put to one side, check out HMRC’s calculator.
Some bookkeeping software providers also include a tax liability calculator which updates automatically as you update information in your bookkeeping records.
How do sole traders pay taxes?
You’ll need to submit annual Self Assessment tax returns so that HMRC can work out how much tax you owe. To do this successfully (and to minimise the risk of receiving fines or penalties from HMRC) you must keep accurate financial records throughout the tax year.
The system that you use needs to be robust, and with thorough processes in place! Using good bookkeeping software could help you keep everything stored safely without losing bits of information here and there.
It’s also worth keeping an eye on the approach of MTD for Income Tax Self Assessment, which will mean digital record-keeping becomes mandatory.
What is the deadline for submitting my Self Assessment as a sole trader?
This depends on how you’d like to send off your Self Assessment. If you need to file a Self Assessment for the 2023/24 tax year and want to submit a paper tax return, the deadline is midnight on 31st October 2024.
The most popular option is to submit online, which also gives you a little longer to submit. To send an online Self Assessment for the 2023/24 tax year you have until midnight 31st January 2025.
When do I need to pay my taxes?
There are two dates to have in your calendar for paying Self Assessment taxes as a sole trader: 31st January, and 31st July.
In January you’ll pay the balancing payment of any tax you owe from the previous tax year, but you might also need to make a payment on account.
Payments on account are advance payments towards your tax bill, the theory being that this eases the pain of paying what you owe all at once. HMRC work out how much you need to pay for each instalment by assuming that next year’s profits will be the same as this year’s, although this can result in paying more (or less) tax than you need to.
You’ll need to make payments on account if your Self Assessment tax bill comes to more than £1,000, or if less than 80% of your tax bill has already been collected at source, for example through employment.
The deadline to pay the second instalment is 31st July.
How do I pay my Self Assessment tax bill?
There are several ways to pay your Self Assessment tax bill, including:
- By direct debit
- Through your online bank account
- Online
- Via a telephone bank transfer
- By cheque through the post
- Through your tax code
It can take between 3-6 working days for payments to show on your HMRC account.
How do I pay myself as a sole trader?
So, what happens after you pay your tax bill? The good news is that as a sole trader, you can pay yourself the money that’s left over from the business’s profits at any time – sometimes referred to as ‘drawing’. You just need to ensure you’re recording all your transactions first, and you put money aside to pay your taxes on time.
As a sole trader, keeping all your records in one place and up to date makes it much easier to pay the correct amount of tax to HMRC. Learn more about Pandle and sign up for quick efficient bookkeeping!
