Sole Trader Taxation in the UK: Understanding and Optimizing Your Tax Obligations

In 2020, there were around 6 million sole traders in the UK Of these, 4.6 million have no employees. Private businesses accounting UK make up more than 50% of the UK’s total private sector, and as the modern business world develops, this number is expected to increase. Many people enjoy the freedom and autonomy that running their own business accounting UK or being self-employed can bring. Starting sole trader taxation is a relatively simple process, and for many people, it’s a way to turn their passion into a legitimate profession; however, you must follow certain rules and regulations to comply with business accounting and sole trader taxation laws. 

What Is An Individual Entrepreneur?

If you decide to start your own business Accounting UK or become self-employed, you will need to decide whether you want to become a sole trader or form a limited company. Sole entrepreneurs manage their businesses as individuals and are self-employed. If something goes wrong you need an understanding that sole traders are personally responsible for any losses or debts arising from their business activities.

There are many businesses or forms of self-employment where registering as a sole trader is suitable, for example:

  1. Babysitters. 
  2. Independent cleaner.
  3. Independent creators (writers, designers, tattoo artists).
  4. Children’s entertainer.
  5. Craftsmen (plumbers, plasterers, carpet makers, etc.).
  6. Hairdressers. 

Sometimes, business owners choose to structure their business as an L.L.C. instead of as a sole trader. Limited companies operate as legal entities themselves, meaning directors and shareholders have little personal liability for debts, losses, and liabilities.

L.L.C.s typically have a more complex business structure than sole traders (although sole traders can still subcontract work to others).


When considering how best to structure your business accounting or subcontract work, you should also consider IR35 requirements. This applies where work is carried out on a self-employed basis through a limited company, but the worker actually behaves more like an employee. IR35 does not apply to sole traders.

An individual entrepreneur is an independent worker, self-employed, and fully responsible for business accounting activities. They must be registered with HMRC, either under their company name or their own name.

The L.L.C. itself is a legal entity. They must have at least one designated director responsible for running the business, ensuring compliance,  keeping records filing corporate tax returns, and optimizing your tax obligations. Limited companies must be registered for Corporation and Housing sole trader taxation with HMRC.

Do Sole Traders Have To Pay Corporate Tax?

Every limited company in the UK will be subject to corporation sole trader taxation. Businesses operating as sole traders (or partnerships) do not have to pay sole trader taxation.

What Taxes Must Business Individuals Pay?  

Sole traders must pay income tax on their profits for each tax year, which runs from April 6 to April 5 of the following year. Sole traders are also required to pay class 2 and 4 national insurance contributions. When determining the amount of sole trader taxation you must pay, you are allowed to take into account reasonable expenses you have in running your business and offset them against your income. In order to optimize your tax obligations.

These Costs May Include:

  1. Marketing and advertising.
  2. Materials or stock. Phone or Internet (for professional use only).
  3. For rent.
  4. Utility bills.
  5. Travel expenses, specialized vehicles, and fuel.

As a sole trader taxation rule, you will pay taxes based on your annual profits. You calculate your profits by deducting your professional expenses from your self-employment income. 

How Are Individual Businesses Taxed?

For sole traders’ taxation,  their profits are taxed through an annual self-assessment system run by HMRC. Sole traders receive a personal allowance (tax-free amount) that they can earn each year tax-free. For the current tax year (2021/22), this amount is £12,570. This allowance is the same for those employed through P.A.Y.E. and independent business individuals. Normally, UK employees must pay tax on their salary (if their income exceeds their personal allowance). 

They will receive a  weekly or monthly pay slip that details how much they receive and how much they have had their employer deduct for national insurance and income tax. When individual entrepreneurs are self-employed, understand they are responsible for organizing their own taxes. This is done annually, usually online (although hard copies are available).


Once registered with HMRC as a sole trader taxation, you will receive all the information you need to access your self-assessment account online through the Government Portal. You will need your unique tax identification number (UTR), password, and activation code.

An activation code is required if this is your first time completing a self-assessment. It will be sent by post to the address you provided when registering as self-employed and takes up to ten days, so make sure you have plenty of time to log in and complete the declaration. Tax before the deadline (January 31). HMRC will write to you throughout the year to remind you that your self-assessment for this year is due.

When Do Business Individuals Pay Taxes? 

You will have to pay taxes on your profits every year you are in business accounting. You must inform HMRC about your income using their self-assessment system. The deadline to complete the self-assessment is January 31, and you must pay any tax you owe.

Legally, you are not required to register your business accounting until October following the first tax year in which you begin operations; however, it is recommended to register as soon as possible. Sole traders only have to pay tax if their profits exceed their personal tax deductions. However, even if you lose money or only make a small profit, you MUST complete your self-assessment form every year. You will then receive notice that you do not have to pay any tax  (you will have the option to make Class 2 N.I. contributions to ensure you enjoy certain benefits, although this is optional ).

Once you have completed your self-assessment with HMRC, you will be advised exactly how much you need to pay and when you need to pay. There are different ways to pay, and in some cases, you can also set up a payment plan. Some businesses will also be required to pay their bills for the following year based on the profits they report. These payments are due at the end of July and the end of January. 

How Much Tax Must Business Individuals Pay?

The payments you will have to make each year will reflect the profits you have earned. As for salaried workers, the higher their income, the more taxes they have to pay. You need proper business accounting to optimize your tax obligations.

Personal Allowance

Currently, £12,570 – You can earn this tax-free.

Income Tax

Currently (tax year 2021/22), if your income exceeds the Personal Allowance threshold, you may have to pay the following tax:

  1. Income over £12,571 and under £50,270 have a Basic income tax rate of 20%. For income over £50,271 and those under £150,000, the Income tax rate is higher than 40%.
  2. Income over £150,000 The additional income tax rate is 45%.

National Protections

Your National Protections commitments are more often than not calculated and paid by self-assessment.

There are two sorts of national protections that apply to self-employed individuals:  

  1. Category 2 – For annual profits over £6,515.
  2. Category 4 – For annual profits over £9,569. Type 2 national insurance gives you certain benefits. If your income is below the threshold, you may want to make voluntary contributions instead.

Prices For Tax Year 2021/22:

  1. Grade 2 – £3.05 per week.
  2. Category 4 – 9% on profits between £9,569 and £50,270.
  3. 2% on profits over £50,270.


VAT isn’t payable until your commerce has a yearly turnover of £85,000.

On the off chance that your yearly wage surpasses this constraint as a sole dealer, you’re required to enlist for Value Added Tax (V.A.T.), which is payable on most goods and services. You will have to charge V.A.T. on your sales; however, you can also reclaim it on purchases.

The assessment you owe will be the ultimate sum for the past assessment year. This means if you file on January 31, 2022, it will be for the last full tax year (2020/21). The amount you owe is called a ‘balancing payment .’If your tax bill exceeds £1,000, you will receive an additional payment on your bill that goes towards next year’s bill. This is referred to as ‘payment on account.’

Payments on account are due twice yearly. They are advance payments towards your next bill. They are calculated as half your bill from the previous year, payable by midnight on July 31 and January 31. You can find out more about the balance of payments and see examples on gov. uk.

How Do Business Individuals Pay Taxes?

Legally, you are required to pay all taxes and national insurance that you owe to the government. This amount is paid through an annual self-assessment system. Once you’ve entered all of your information for the tax year into the system, it will tell you exactly what you owe.

There are a number of ways you can pay your tax bill  as a sole trader:

  1. Same-day or next-day service
  2. Use your online banking account.
  3. Phone banking (through faster payments).
  5. At your bank or building society branch (this requires a payment slip from HMRC). Company debit or credit card (personal credit card payments are not allowed).
  6. Service within three business days
  7. Direct debit (this must have been previously set up with HMRC).
  8. By postal check.


If you haven’t set up direct debit with HMRC, you can still pay this way, but it will take up to 5 working days to complete.

Ensure Payments

You need to ensure that the payments you make reach HMRC on time. HMRC imposes penalties on people who submit their annual tax returns late or do not pay the tax they owe on time. It’s important to leave enough time for your payments to arrive and consider whether the deadline falls on a weekend or public holiday, in which case they should be received on the last business day previously (this does not apply to Faster Payments or debit/credit card payments).

If you know you owe self-assessment tax as a sole trader and will have difficulty paying, you can arrange to pay in installments (this only applies if your invoice is under 30,000 pounds). Can be both self-employed and self-employed. This could be because you have more than one job or do additional freelance work. In this case, any tax you owe can be deducted at source using your tax code. If you are registered as a sole trader and employed and you believe your tax code is incorrect, you should contact HMRC immediately to avoid under or overpayment of tax.

How Do You File Taxes As An Individual Entrepreneur? 

Each year, you will need to file a tax return through the government’s annual self-assessment system. This is usually done online and is relatively simple. You will need to log in with your unique tax I.D. and password and provide the information requested by the assessment form. Once you have completed all the pages, you will receive confirmation of the amount of tax and national insurance you need to pay (if any).

If you complete your review online, you have the option to view it after completing all relevant fields but before submitting it. To do this, select “Show your calculations”. After submitting your final self-assessment, you’ll also be able to see what you owe on your account by logging in (this may take up to 72 hours to appear). If you submit a  copy of your assessment, you will receive a tax invoice in the mail.

The annual self-assessment is generally very simple, and as a sole trader, setting up a business is usually quite simple  – you shouldn’t encounter too many problems. This will be much easier if you keep clear records of your sales and transactions during the year. Having a dedicated business bank account will also make it much easier to evaluate your income throughout the year.

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