Pay Yourself as a Sole Trader: How to Manage Finances and Put Aside Tax?
Being a sole trader means you are not employed and need a salary or wage in a traditional sense. So, as a sole trader, how can you pay any tax due? The answer is simple: you can pay yourself based on personal drawings and draw tax from the company profit.
However, taking out money comes up with some effort. It is vital to keep proper bookkeeping as it will assist you in calculating profits and paying taxes on them. Also, you must put money aside to pay your tax bill while submitting your annual Self Assessment.
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- Can I pay myself as a sole trader for my business?
- Is a Business Bank Account Necessary?
- What Amount Should I Reserve to Pay Tax as a Sole Trader?
- Can I take all of the Business Money?
- I have earnings from both employment and dividends: what should I do?
- I have earnings from both employment and dividends: what should I do?
- How Will My Profit Be Reported to HMRC, and How Can I Pay?
- What about Managing National Insurance?
- What About the Expenses of Sole Traders?
Can I pay myself as a sole trader for my business?
Simply take out money from the business account to pay yourself. So, for your sole trader finance, make a separate business account. You have to be sure that you keep a record of the drawings along with incomings and outgoings. Also, make sure to put money aside for any taxes you owe. Make sure the money is always ready whenever you need to pay. For instance, you can put an amount into a savings account to earn interest from the taxman.
Is a Business Bank Account Necessary?
Yes, a bank account is mandatory for setting up your business. It is also compulsory to attach this to your business banking. Using a bank account for your personal and business expenses will be much easier as a sole trader. Regarding self-assessment, keeping a record of all your bank statements becomes tricky. You might wonder sometimes if the £4.55 spent was your lunch bill or business expense.
So, how can you avoid such confusion with HMRC? You can do so by keeping your personal and business banking separate. Several banks do not allow companies to create a combined individual and business account. Most bank accounts in the UK enable the same banking but with a monthly fee, and they offer free banking for a set amount of time.
What Amount Should I Reserve to Pay Tax as a Sole Trader?
So, being a sole trader, you must file a tax return and pay the tax. Essentially, your business profit is calculated after deducting your business expenses. Also, these expenses must be for business with no personal expenses involved.
The more money you earn, the more profit you will have to pay the taxes. So it is better to set aside your drawings from business. This way, you can cover your income tax and National Insurance Liabilities each year.
| Annual Profit | Amount (%) set aside for tax |
| Upto £50,000 | 25% |
| Upto £100000 | 40% |
| Between £100000 and £150,000 | 45% |
| More than £150000 | Less than 45% |
Can I take all of the Business Money?
Being a sole trader, your business and you are the same. You receive your business income and pay expenses and taxes that you must pay as an individual. This can be a little confusing as there’s a time difference between getting the income from customers and paying all the personal tax you owe on the profit.
I have earnings from both employment and dividends: what should I do?
Getting money from both employment and self-employed income? Then, be ready to tell HMRC about your annual self-assessment tax return. Your employer must have deducted the income tax and National Insurance due through the Paye As You Earn scheme.
You can also get the details from the P60 form that your employer should hand you over at the end of the tax year. Also, ensure to mention your self-assessment for the particular tax year. HMRC will calculate any additional income tax or any due Self-Employed National Insurance.
Also, if you receive dividends from a company or any other income, you must declare it to HMRC so that they can calculate the tax you owe.
How Will My Profit Be Reported to HMRC, and How Can I Pay?
When you file your self-assessment tax return, your profits are automatically reported to HMRC. So, your income tax and NICS calculation will show how much we must pay on the final tax bill. So, all your taxes must be paid before the 31st of January each year. In other cases, HMRC can fine you with penalties starting from £100.
If your tax bill is more than £1000 for the year, you must make a Payment on the Account. This is HMRC’s way to ensure that the tax is paid regularly. For payment on account, usually, there are two payments: the first is made by 31st January, and the second is due on 31st July each year.
If you do not have such sole trade profit in the tax year, you must speak to HMRC and may be able to reduce your payment to HMRC. This tax and accounting system is much simpler for a sole trader than a limited company. However, you will find it easier to use an online accounting system to keep a complete track and file self-assessment. So Lockhart Amin Accountants is here to assist you and provide unlimited professional support.
What about Managing National Insurance?
There’s no difference in the National Insurance you pay on your income from your employer. However, the income will differ slightly from that of self-employed profits.
- If your profit exceeds £6725, you won’t have to pay Class 2 National Insurance Contributions as a self-employed person.
- If you earn a profit of £12,570 per annum as a self-employed, you must pay Class 4 contributions.
For the tax year 2024 to 2025, you’ll pay
- 6% on the profit of £12570 up to £50270
- 2% on the profit of £50270
Class 4 National Insurance Contributions based on your business profit will be calculated after your self-assessment tax return. So, with the income tax, HMRC will also calculate the Class 4 National Insurance, so you pay both liabilities as part of your tax bill.
| 2023/2024 tax year | 2024/25 tax year | |
| Small profits and earnings below this threshold are not required to pay NICs. However, you can pay voluntarily. | £6725 | £6725 |
| Class 2 NICs are for those earning above the Small Profits Threshold | £0 per week | £0 per week |
| If your annual profit is up to lower profit earnings, you must pay Class 2 NICs. You can pay class 4 national insurance if the amount exceeds. | £12570 | £12570 |
If your earnings for 2023/24 fall between the lower and upper-profit limit, you must pay
|
£50,270 | £50,270 |
Earnings above the upper-profit limit
|
Over £50,270 | Over £50,270 |
So, with the increase in your profits, your NICs will be calculated based on tax year and NIC type.
What About the Expenses of Sole Traders?
You might want to know the benefits of registering as self-employed. So, you will get an advantage from offsetting your business against your income. You are only taxed on your self-employed profits.
The situation is the same for the limited company. Your salary is considered an allowable business expense while operating as a limited company. Numerous other business expenses are present that can be claimed and have the benefit of reducing the company profit and the amount of corporation tax your company needs to pay.