Paying Tax As A Sole Trader – Step-By-Step Guide

Being a sole trader brings several benefits, including complete flexibility and control to run your own business, exactly as you want it. 

It’s not surprising then that more than 50% of businesses in the UK private sector are sole traders. We’ve banged the drum of why being a sole trader can advantage you many times before. 

There is one caveat to this, though. As a sole trader, you are responsible for calculating and paying your own tax and national insurance. This isn’t automatically deducted from your salary because you’re not employed (unless you’re working two jobs!). This one is on you. 

But don’t worry, learning how to pay tax as a sole trader isn’t as complicated and daunting as it might sound. To help you through it, we’ve put everything you need to pay tax as a sole trader in the UK right here. 

Let’s get started! 

Step 1: Register for self-assessment 

The first step to paying tax is to register as a sole trader and for Self Assessment with HMRC. If you’ve already done this step, then great news! Continue onto the next phase. 

If you haven’t, this step is essential for submitting your taxes and is a requirement for if you: 

• Have earned more than £1,000 from self-employment in the tax year
• Must prove you’re self-employed, for example, to claim Tax-Free Childcare
• Make voluntary Class 2 National Insurance payments in order to help qualify for benefits

It’s possible to register as a sole trader while you are still employed – so for those who are setting their business up on the side, you’ll still need to abide by the above rules. To help you out, we’ve also got a guide on how to start a business while still employed.

Step 2: Complete your self-assessment 

Sole traders are taxed through their self-assessment returns. This is completed every single year, before the deadline of 31st January. 

As part of the Making Tax Digital initiative, most self-assessment returns will usually be completed online through the Government Gateway. 

To access this, you’ll need your Unique Tax Reference (UTR) and password. If this is the first time completing your self-assessment, you’ll also need an activation code which will be supplied via post to your business address.

This means you need to give yourself plenty of time to register before the 31st January deadline if you want to avoid any late fees or charges.

Once logged in, you will be able to complete your assessment. For this, you will need detailed records of all your finance. If you have been, or still are, employed within the last 12 months you may also need records like P60 forms, payslips or your P2. In this case, you will need to also fill out the first employment section of your self-assessment tax return. 

Now let’s run through your self-assessment form and what you should be putting down in each section. 

Personal details 

Like any form, you have to start with personal details about yourself. This will include your data of birth, name, address and national insurance number. 

Income

Under the business income section, you will be asked to enter your annual turnover. This is the grand total of everything you have earned that year, before any expenses or taxes are added. For example, on James’s self-assessment tax return, his annual turnover is £40,000. 

Expenses 

Sole traders can claim for any expenses to help run your business, provided that they are ‘wholly and exclusively for your business. That means that if you run your business from your home, or take calls on your normal phone, you can’t expense these. 

To make sure that you’re always getting the best deal for your business, we’ve put together this guide on what expenses can a sole trader claim. Ultimately, sole trader expenses include items like: 

• Marketing and advertising
• Materials or stock
• Phone or internet bills
• Rent for premises
• Utility bills
• Travel expenses, business vehicle and fuel

Any expense that you make offsets the amount of Income Tax that you’re eligible for. In James’s case, he has £2500 worth of expenses that he can claim for. 

There are two different ways of entering this on the self-assessment form, depending on what your annual turnover is. If it’s over £85,000 – you will have to list each kind of expense and the amounts, plus a total at the end. If it’s under that amount, you just have to put the total expense value. 

As James’s turnover is just £40,000, he just enters £2500 into the expense section. 
It’s worth pointing out that you can only claim for expenses if you aren’t using the £1,000 tax-free trading allowance. If you’re ever unsure about what you can or can’t claim, make sure you speak to your accountant.

Step 3: submit your self-assessment

Once all relevant information is done, it’s time to send off your self-assessment tax return and find out how much tax you will have to pay. 

As a sole trader, you will be liable to pay Income Tax on your profits, as well as Class 4 National Insurance. Previously, sole traders had to pay both Class 2 and Class 4 National Insurance contributions, but as of April 2024, Class 2 NIC has been abolished.

Expected Income Tax 

Income tax is calculated based on your annual profits and split into different bands depending on what you have earned. Sole traders are allowed up to £12,570 tax-free as a personal allowance. So if your profits fall under this amount, you won’t be liable for any tax. 

If your business earned more than that in profits, you would fit onto one of the following tax bands, based on the tax year 2024/25. 

James’s annual turnover was £40,000. The first £12,570 he earned is tax-free, so he only needs to pay Income Tax on the remaining £27,430. As the total is less than £50,270, he will be charged at Basic Income Tax rate of 20%. 

A 20% tax rate on the remaining £27,430 is £5,486. As James entered £2500 in expenses, the total Income Tax bill will be £2,986. 

Expected National Insurance

Sole traders will need to pay Class 2 National Insurance contributions, which are again dependent on how much income you earn. Class 4 contributions are a 2% rate on any profits between £12,570 and £50,270, or 2% on profits over £50,270, based on 2024/2025 classifications. 

For James, the first £12,570 of his income earned is tax-free, so he only needs to pay a 6% national insurance tax on the remaining £27,430, which amounts to £1645.80.

Step 4: Pay your tax 

Once you have your total tax bill, it’s time to pay. 

To pay your tax, you can: 

• Transfer the balance using your online bank account or in-branch using a paying-in slip from the HMRC
• Pay via debit card or corporate credit card (payment by personal credit card is not allowed);
• Pay via CHAPS
• Pay via telephone banking
• Use an existing Direct Debit that has previously been set up with HMCR (be aware, direct debits can take up to 5 days to process, so make sure you avoid any late fines by paying this early)
• Via cheque in the post (which also needs time to clear!)

Payment via the Post Office is no longer an option. 

If the payment deadline falls on a weekend or public holiday, the funds must be cleared by the last working day before. Failure to pay on time could result in hefty fines. 

If you’re struggling to make payments, you may be able to arrange to pay in instalments with the HMCR. 

The deadline for paying your tax bill, or any Class 2 National Insurance contributions (NICs), is 31 January 2025. 

If you have not paid by the deadlines, you’ll have to pay a £100 penalty as well as further penalties if your return is more than 3, 6 and 12 months late.

Lost the buzz for your business?

Starting a business is exciting. Succeeding is rewarding. The bit between is hard, repetitive, and full of self-doubt. 

The Lonely Middle Club (From Business4Beginners) helps you through it:

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Make easy work of self-assessment tax with accounting software 

One of the easiest ways to submit and manage your self-assessment tax returns is by using accounting software. Designed to help you save time and money, accounting software can: 

• Help you organise your finances by keeping accurate track of your finances
• Automatically calculates your income and expenses for you
• Gives you real-time insights about your finances to help make strategic decisions 
• Helps you prepare, or even submit, your self-assessment tax returns 
• Make it easier to stay compliant with tax deadlines and regulations. 

No matter the size or type of your business (or how much accounting know-how you have!), there’s an accounting software out there that can help your business. Find your right match by taking a look at our top-reviewed accounting options for sole traders. 

Need more tax help?

Now that you have a much stronger idea of how to pay tax as a sole trader in the UK, there might be some points you still need further information. Whether you’re looking for: 

• The best accounting software to keep your books in order
• Infomation and advice on how to fill out your taxes – and the reliefs you might be eligible for
• A reliable accountant that you can trust to help you out

We’ve got you covered. Always. 

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