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Sole trader tax responsibilities are essential to know when you are self-employed. Whether you are working ‘full time’ for yourself or you have a side hustle, you are responsible for your taxes. Here is a guide to help.

Sole trader tax responsibilities - image of a to do list

What is a sole trader?

If you’re a sole trader, you run your own business as an individual and are self-employed.

You can keep all your business’s profits after you’ve paid tax on them. You’re personally responsible for any losses your business makes. You must also follow certain rules on running and naming your business.

When you need to set up as a sole trader

If you’re wondering whether you need to set up as a sole trader it can be helpful to check the latest requirements.

How to set up as a sole trader

To set up as a sole trader, you need to tell HMRC that you pay tax through Self Assessment. You’ll need to file a tax return every year.

Sole trader tax responsibilities

To organise and file your taxes you will need to do a few things.

Keep records of your business’ sales and expenses

The first thing you’ll need to do as a sole trader is keep records of your earnings and expenses. This includes all of the incomings and outgoings for your business. This helps you report the correct amounts to HM Revenue and Customs (HMRC) – and pay the right amount of tax on what you earn. To make life easier you can use software such as Xero.

Send a Self Assessment tax return every year

As a self-employed sole trader, you’ll need to register with HMRC for a Self Assessment tax return.

While the details can seem complicated, the overall purpose of your Self Assessment is simple: you report your earnings and expenses and HMRC then calculates how much tax you owe on your net income.

The simplest way to fill out your return is online, and this also gives you a later deadline: where paper returns must be submitted by 31 October, online submissions aren’t due until the following 31 January.

Sole trader tax responsibilities include paying Income Tax and Class 2 and Class 4 National Insurance

As a sole trader everything you earn by doing business counts as income for tax purposes.

The tax bands for tax year 2021-22 are as follows: (subject to change in subsequent tax years)

  • tax-free personal allowance: up to £12,570 
  • £12,571–£50,5270: 20% 
  • £50,271–£150,000: 40% 
  • over £150,000: 45%

As these are marginal tax bands, they only apply to the portion of your income that falls within the band.

The self-employed must usually pay Class 2 and Class 4 NICs, in the following bands:

Class 2 Paid on annual profits above £6,475 £3.05 per week

Class 4 Paid on annual profits above £9,501 9% of profits between £9,501 and £50,000 and 2% of profits above £50,000

Completing the Self Assessment process will tell you how much you owe in each of these categories. After that, you’ll have a few options for how you pay, including by cheque, deposit or bank transfer.

Outsourcing your sole trader tax responsibilities

If you would like support with your sole trader tax responsibilities, we can help. From setting up your business’ finances for success, keeping your finances organised and filling in your self-assessment we can make life easy for you. Contact us today.