How to Pay Yourself as a Sole Trader
As a sole trader, you don’t receive a salary or wage in the traditional sense. So how do you pay yourself? How much should you put aside to pay your tax as a Sole Trader?
It’s simple: you’re paid based on ‘personal drawings’ from your business. You can simply draw money from your business account to pay yourself as a sole trader. And you pay Income Tax and National Insurance Contributions based on the profit your business makes.
When you’re a sole trader, there is no legal difference between you and your business. You as an individual receive the income and pay the expenses, including your tax liability. So, it’s important to keep a record of any personal drawings you take from the business to pay yourself. This helps you to keep on top of your bookkeeping and helps when calculating your profits, as eventually, you pay tax on your profits. You’ll also need to put some money aside to pay your tax bill when you submit your Annual Self Assessment.
How to pay yourself as a Sole Trader and keep records?
We strongly recommend that you use or open a separate business bank account for your sole trader finances. You need to make sure that you keep a record of all your drawings, along with any other outgoings and incomings. Don’t forget though to keep money aside to pay any tax you owe. This should be easily available but you can put the tax money into a savings account to earn interest until you pay it to HMRC. More tips on how to manage your accounts and cashflow
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How to pay yourself as a Sole Trader and pay your taxes?
As a sole trader, you’re taxed on the profits that your business makes (the income that your business receives minus the allowable business expenses incurred) through your annual Self-Assessment tax return. These expenses must be purely for business, and must not include personal expenditure.
The higher the profit you make, the greater your tax liability will be. We recommend that you set aside the following amounts from your regular drawings to settle your Tax and National Insurance liabilities each year:
Annual Profit | Percentage to set aside for Tax |
up to £ 50,000 | 25% |
up to £ 100,000 | 40% |
between £ 100,000 and £ 150,000 | 45% |
over £ 150,000 | 45% |
Your profits are reported to HMRC each tax year through your Self-Assessment Tax Return. If you receive other income, such as employed income, rental income or dividends, as well as your self-employed income, you’ll also need to declare this on the tax return. Your income tax and NICs calculation will state how much is owed on your final tax bill.
If you have income from employment, your employer should have deducted the income tax and National Insurance due through the Pay As You Earn (PAYE) scheme. You can see this information on Form P60 which your employer must give you at the end of the tax year. You include the income tax deducted by your employer on your Self-Assessment for the same tax year and HMRC will calculate any additional income tax or Self-Employed National Insurance due.
How to pay my tax to HMRC as a Sole Trader?
Your profits are reported to HMRC each tax year via your Self Assessment Tax Return. Your income tax and NICs (National Insurance Contributions) calculation will tell you how much you’ll be paying on your final tax bill. Your Self Assessment must be filed and all taxes you owe must be paid before January 31 each year. Otherwise, HMRC will fine you starting from £100.
If your tax bill is more than £ 1,000 for the year, you’ll be required to make a Payment on Account. This is HMRC’s way of ensuring tax is paid regularly and it goes towards your next Self Assessment. There are two payments made towards the Payment on Account: the first must be made by 31st January and the second payment is due on or before the 31st July each year.
See another of our blogs on our website, to understand more about ‘What is a Sole Trader’.
At Libabun Accountancy, we make it easier for you to file your tax to HMRC through XERO Accounting software. Tax time isn’t the ordeal it used to be. XERO can estimate taxes owed because it has a record of all the money coming and going from your business, it can quickly run the maths to estimate your taxes and quickly produce the reports needed to finalise a tax return.
Libabun Accountancy is part of Libabun Business Agency. We help Small Businesses grow, automate and thrive.
Please refer to our main website for more details.
Helpful links:
Self Assessment Tax return: https://www.gov.uk/self-assessment-tax-returns