SMALL BUSINESS RESOURCES

Sole Trader Tax Explained

4 min read

Sole trader tax in the UK falls under the category of ‘Self-Assessment’. If you operate a sole trader business, it means you’re responsible for understanding, calculating, and paying the correct sole trader tax rate.

However, with the right information, paying tax as a sole trader is easy business. 

Let’s unpack the different sole trader tax rates and how to calculate and settle those tax responsibilities with HM Revenue & Customs.

Definition and responsibilities of a sole trader

For the UK, to qualify as a sole trader and be liable for tax responsibilities you must:

  • be self employed
  • earn over £1,000 from self-employed business activity between 6 April 2020 and 5 April 2021.

As a sole trader entity, you’ll be required to do the following:

  • Keep accurate records of both your sales and expenses. This is most easily achieved through cloud accounting software.
  • To pay your sole trader tax, you’ll need to inform the HMRC that you’ll be operating as a sole trader and will pay your own taxes and file a tax return every year. To do so, you’ll first need to register for Self-Assessment.
  • Prepare and submit a Self-Assessment tax return every tax year.
  • If you earn over £85,000, you’ll also need to register for VAT (value-added tax).
  • Pay all applicable income tax on your business profits and Class 2 and Class 4 National Insurance. You can make use of the HMRC’s budget calculator to assist you when it comes to budgeting for this.
  • If you’re moving to the UK with the intent of setting up a sole trader business, you’ll also need to apply for a National Insurance number.
  • You must not use the word ‘limited’ or any offensive words in your business name.

Sole trader tax rate

The UK sole trader tax rate will differ depending on your income. 

For the 2020/21 tax year, the following tax rates will apply*:

  • Tax free threshold: £0 – £12,500
  • Basic rate of 20%: £12,500 – £50,000
  • Higher rate of 40%: £50,000 – £150,000
  • Additional rate of 45%: over £150,000

*It should also be noted, that for the 2020/21 year, residents of Scotland will have different rates.

How to calculate tax for sole trader

After understanding the sole trader tax rate brackets laid out above, the easiest and most dependable method for understanding your sole trader tax responsibilities is to make use of the HMRC’s sole trader tax calculator.

Failing this, you should consult with a bookkeeper or accountant to gain certainty over your tax rate and responsibilities.

How to pay tax as a sole trader

Once you’ve registered yourself with the HMRC, understood your tax bracket and kept records of sales and expenses, you’ll need to pay your tax as a sole trader. 

Keep in mind that you should have been budgeting for this tax payment as a matter of Self-Assessment. Ideally, you should have a separate bank account set up with your expected tax payment in it. 

Failure to save an adequate portion of your earnings to pay your tax bill may become a serious financial burden and a compliance issue.

To pay your income tax bill, you have two options:

  1. Fill out and submit your own Self-Assessment tax return.
  2. Consult with a bookkeeper or accountant to handle this on your behalf.

Using an advisor to lodge a tax return

As with almost any important tax or compliance concern, you simply can’t go past the value of expert advice in the form of an advisor – whether you choose a bookkeeper or accountant.

As a sole trader, it’s likely your operations are a simpler affair than a larger and more complex business. For this reason, a bookkeeper is a perfect choice for simple tax lodgement and advice. 

A bookkeeper excels at tax lodgement and related services, so do yourself a favour and book a consultation.

If you run a complex sole trader business, or you seek more robust advice such as cashflow projection, risk reduction or business model advice, you may wish to seek the expanded services of a business accountant. 

Not only can an accountant do your taxes like a bookkeeper, they also bring extended business advisory services to the table.

Sole trader tax return

To complete your Self-Assessment tax return obligations (If you choose to go it alone and forgo the services of an advisor) you have two options remaining:

  • Paper tax return: The least likely, yet still viable option. You can find a paper tax return here.
  • Online tax return: Your most likely option will be to fill this out online. You can do so here.
  • Keep in mind that failure to lodge, or lodging late, will attract penalties.

Sole trader tax return dates

To ensure compliance, you’ll need to complete your sole trader tax return by a certain date. The key dates are as follows:

  • Last tax year began on 6 April 2020 and ended on 5 April 2021
  • Paper tax returns are due midnight 31 October 2021
  • Online tax returns are due midnight 31 January 2022
  • You must pay the tax you owe by midnight 31 January 2022.

If you seek any further information around your sole trader tax responsibilities, please refer to the HMRC website for details and support.