How much tax does a sole trader pay?

How much tax does a sole trader pay?

Victoria Scally News

How much tax does a sole trader pay? A tricky thing to plan for as a Sole Trader, for a number of reasons.

Here we break down exactly what you can do to help this feel a little less unknown and to help plan. Please note, if you are a Limited Company director, this blog is for you.

There is a great ‘rule’, handed down from self-employed person to self-employed person, which is a good starter to help you plan.

A very good general rule of thumb is that you put aside 25% of your profit for your tax bill.

For the majority of people, this works out really well and is sufficient to cover your tax bill which is paid by the 31st January each year.

If you owe more than £1000 of tax, you will often pay twice a year (31st January and the 31st July).

This rule will help you in both cases.

How much tax does a sole trader pay?

Here is a reminder of the tax you have to pay as a self-employed person:

  • You pay 20% tax on anything over £12,500 and less than £50,000 (in the 20/21 tax year).
  • You also pay National Insurance at 9% over £9,500 a year, and a small amount in ‘Class 2’. This will be around £158 per year.

The combination of these factors makes the 25% ‘rule’ generally sufficient to cover your liability for the year.

Any exceptions?

If you have an awesome year and earn upwards of £50,000 profit, this will likely not be enough (as you will start to pay tax at 40%). It will give you a good ‘pot’ to help, however.

Some people like to save this 25% in a separate bank account. Then after they paid the bill each year, they can make a decision on what to do with any excess funds (booking a holiday is a common occurrence…..).

You can see more information on how tax payments work as a sole trader, as well as other common questions in Our Start-Up Guide.

There are also a series of videos on our YouTube Channel.