As a sole trader, you don’t receive a salary or wage in the traditional sense. So how do you pay yourself?
It’s simple: you’re paid based on ‘drawings’ from your business. You can simply draw money from your business account to pay yourself as a sole trader. For this reason, it is recommended that you use a separate bank account for your sole trader finances.
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. Although as a self-employed individual you have 10 months to pay any tax that you owe, it is always handy to have the money there ready, therefore it is recommended that you put money aside throughout the year. So, how much should I put aside to pay my tax as a Sole Trader?
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. Obviously, the higher the profit you make, the greater your tax liability will be. It is recommended that you set aside the following amounts from your regular drawings to settle your Tax and National Insurance liabilities each year:
|Drawings per annum||% set aside for tax|
|up to £50,000||25%|
|up to £100,000||40%|
|between £100,000 and £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. Your Self-Assessment must be filed, and all taxes paid before the 31st January each year.
If you would like any further clarification please do not hesitate to contact us.