If you’ve been self-employed for a while, you’re probably more than aware that sole traders are fully responsible for preparing, paying, and filing their own taxes. Unfortunately, it’s all part of running your own business!
Even so, setting aside the right amount of tax can be complicated. If you’re off in your calculations, or accidentally overlook something, you could be hit with a pretty hefty bill at the end of the financial year!
So to help you accurately plan ahead, we’ve put together a quick explainer to take you through the different taxes you may owe, how they’re calculated, and how to get it right every time.
Let’s get started!
- Overview
- Income tax
- National Insurance Contributions
- VAT
- Student loan repayments
- Private pension contributions
- How Hnry sorts it all
An overview of self-employed taxes
There are three kinds of taxes sole traders need to be aware of:
- Income tax
- National Insurance Contributions (NIC)
- Value-Added Tax (VAT)
As well as these, you might also need to factor in:
- Student loan repayments
- Private pension contributions
How much you’ll eventually owe depends on your individual circumstances. For example, the HMRC has put in place various allowances and benefits that could offset your tax bill, if you’re eligible. You can also lower your taxable income by claiming business expenses – but more on this later!
Because of all this, preparing your taxes isn’t as straightforward as setting aside a set percentage of your income every time you get paid. Instead, you’ll need to understand which rules apply to you, so you can accurately plan ahead and avoid expensive surprises.
Income tax
We have a progressive tax system, meaning that you don’t pay a set percentage of income tax across all your income. Instead, your income will be split across several bands, each with its own tax rate.
💡Note: The rates you use will depend primarily on where you live.
England, Northern Ireland, and Wales
| Band | Taxable Income | Tax Rate % |
|---|---|---|
| Personal Allowance | £0 - £12,570 | 0% |
| Basic Rate | £12,571 to £50,270 | 20% |
| Higher Rate | £50,271 to £125,140 | 40% |
| Additional Rate | over £125,140 | 45% |
Scotland
| Band | Taxable Income | Tax Rate % |
|---|---|---|
| Personal Allowance | Up to £12,570 | 0% |
| Starter Rate | £12,571 to £15,397 | 19% |
| Basic rate | £15,398 to £27,491 | 20% |
| Intermediate rate | £27,492 to £43,662 | 21% |
| Higher rate | £43,663 to £75,000 | 42% |
| Advanced rate | £75,001 to £125,140 | 45% |
| Top rate | over £125,140 | 48% |
The Personal Allowance is reduced by £1 for every £2 of adjusted net personal income you make over £100,000. Basically, if you make £125,140 or more, your tax-free allowance will be £0.
Calculating progressive tax rates
Let’s say that you live in England, earning £30k as a part-time employee, and £23k as a sole trader. Your taxable income is the sum total of all income – so in this case, £53k.
Even though £53k falls into the higher rate tax band, taxed at 40% you won’t owe 40% across your whole income. Instead, you calculate your income tax by applying the bands progressively:
| Band | Income | £53k income in Bracket | Tax Rate % | = Tax Owed |
|---|---|---|---|---|
| Personal Allowance | £0 - £12,570 | £12,570 | 0% | = £0 |
| Basic Rate | £12,571 to £50,270 | £37,700 | 20% | = £7,540 |
| Higher Rate | £50,271 to £125,140 | £2,730 | 40% | = £1,092 |
| Additional Rate | over £125,140 | £0 | 45% | = £0 |
Total income tax bill: £7,540 + £1,092 = £8,632.
Only £2,730 of a £53k income is actually taxed at 40%!
(Note: The above calculation doesn’t include any other allowances you may be eligible for.)
You’ll also need to remember that your employer will be deducting and paying tax on your behalf. Through your PAYE income, you should have already paid £3,484.20 in income tax (this will include the personal allowance).
All you’re directly responsible for paying is your self-employed income tax – in this case, the remaining £5,147.20. Phew!
Allowances and benefits
There are several allowances and benefits that you may be eligible for, depending on your circumstances. Here are two of the most common:
1. Trading and property allowances
As a sole trader, you’re eligible for an additional allowance of £1,000 of tax-free income. You’re also eligible for £1,000 of tax-free income if you earn income from land or property.
If you’re eligible for both, you can claim both!
💡If you’re claiming the self-employed trading allowance, then you can’t claim individual expenses. It’s an either-or situation, unfortunately.
Using Hnry? We automatically claim whatever’s most tax-efficient for your business, whether that’s the trading allowance or individual expenses.
2. Marriage allowance
If you’re:
- married or in a civil partnership, and
- one partner earns within the Personal Allowance band while the other is a basic rate taxpayer,
the lower-earning partner can transfer up to £1,260 of their Personal Allowance to their spouse. This lowers the amount of income the higher-earner will owe tax on, reducing their overall tax bill by up to £252.
National Insurance Contributions
HMRC collects two kinds of NICs from sole traders, called Class 2 and Class 4. What you pay depends on how much profit you make in a given financial year.
If your profit is between £6,845 and £12,570, your Class 2 contributions will be treated as having been paid. You won’t need to pay Class 4 contributions.
If your profit is below £6,845, your Class 2 contributions will not be treated as having been paid. You can pay voluntary Class 2 contributions however, to avoid a gap in your contributions that may impact potential benefits down the line.
If your profit is above £12,570, your Class 2 contributions will be treated as having been paid. You will, however, need to pay Class 4 contributions on any profit between £12,570 and £50,270 at a rate of 6%, and any profit above £50,270 at a rate of 2%.
Sound confusing? Let’s table it!
| Profit | Class 2 Contributions | Class 4 Contributions |
|---|---|---|
| <£6,845 | Not required (although you can contribute voluntarily to avoid a gap in contribution | Not required |
| £6,845 - £12,570 | Treated as already paid | Not required |
| £12,570 - £50,270 | Treated as already paid | 6% on profit in this band |
| £50,270+ | Treated as already paid | 2% on profit in this band |
💡 Profits here means your total self-employed income, minus any business expenses.
VAT
VAT, short for “Value-Added Tax”, is a flat-rate tax levied at 20% on most goods and services sold in the UK (with some exceptions).
If you make £90,000 or more annually, you’re required to register for and charge VAT. Luckily, this is fairly straightforward. You simply collect an additional VAT charge of 20% from your clients, on top of your regular prices/fees – you don’t pay this out of pocket.
For example, if you sell custom birthday cakes for £200, and your cake-making business generates more than £90,000 a year, you’ll need to charge VAT. The new total cost for your cakes will be £200 + 20% VAT = £240
You can calculate the cost of your services + VAT using our VAT calculator.
Student Loan
It’s not a tax, but if you have an outstanding student loan, it is something you’ll need to make payments on to HMRC.
How much you’ll owe each year depends on what repayment plan you’re on. Each repayment plan has its own income threshold, and its own rate of repayment. You only need to pay the set percentage on income above the threshold – any income earned below the threshold is exempt.
| Plan type | Yearly threshold | Monthly threshold | Weekly threshold | Rate of repayment |
|---|---|---|---|---|
| Plan 1 | £26,065 | £2,172 | £501 | 9% |
| Plan 2 | £28,470 | £2,372 | £547 | 9% |
| Plan 4 | £32,745 | £2,728 | £629 | 9% |
| Plan 5 | £25,000 | £2,083 | £480 | 9% |
| Postgraduate Loan | £21,000 | £1,750 | £403 | 6% |
For self-employed earners, HMRC calculates how much you owe based on the income declared in your Self-Assessment. If you’ve been making student loan repayments from a PAYE salary, this will be deducted from the total amount.
Not sure which plan you’re on? Sign in to your online account with gov.uk to check.
Private pension tax relief
Good news – there are tax benefits for regular contributions!
If you’re earning less than £50,270 annually, your pension provider will automatically be able to claim 20% tax relief for your contributions, and add it to your pension fund (called “relief at source”).
Basically what this means is that for every £80 you put into your private pension, you’ll get tax relief of 20% – so here, £20 will be added to your contributions, for a total of £100 toward your private pension.
If you live in England, Wales, or Northern Ireland, and you make above the £50,270 threshold, you’ll need to apply for additional tax relief yourself. In your Self-Assessment, you can claim:
- An additional 20% up to the amount of any income you have paid 40% tax on
- An additional 25% up to the amount of any income you have paid 45% tax on
If you live in Scotland, you can also apply for additional tax relief, just at different rates:
- An additional 1% up to the amount of any income you have paid 21% tax on
- An additional 21% up to the amount of any income you have paid 41% tax on
- An additional 26% up to the amount of any income you have paid 46% tax on
How Hnry Helps
Hnry is an award-winning app and tax service designed to help sole traders with their financial admin. For just 1% +VAT of your self-employed income, capped at £600 a year, Hnry will calculate and pay all your taxes, levies and whatnot for you, including:
- Income tax
- VAT
- National Insurance Contributions
- Student loan repayments
- Private pension contributions (optional)
We also complete and file your Self-Assessment for you, including claiming any tax relief you might be entitled to. It’s all part of the service!
More importantly, we free up thousands of hours for sole traders to focus more on what they do best – their jobs. Hnry is on a mission to make self-employment simple, affordable, and accessible for anyone.
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