How much tax does a sole trader pay in the UK?

How much tax does a sole trader pay in the UK?

If you’re a sole trader in the UK, the honest answer to “how much tax will I pay?” is: it depends on your profit, where you live in the UK, and a few extra factors like National Insurance, student loans, and whether you’re required to register for VAT. The good news is that once you understand the moving parts, sole trader tax becomes predictable—and when it’s predictable, it’s manageable.

This guide walks you through the main taxes a sole trader can pay, the thresholds that matter, and practical ways to reduce surprises. It’s also written for busy people who would rather be earning money than wrestling with admin—so you’ll see plenty of tips on keeping records and invoicing properly using invoice24, our free invoicing app designed to help sole traders stay on top of cash flow and tax-ready paperwork.

What “tax” means for a sole trader

When people say “sole trader tax”, they’re usually talking about three main things:

1) Income Tax — paid on your taxable profits (not your turnover).

2) National Insurance — most commonly Class 4 (and sometimes voluntary Class 2).

3) VAT (sometimes) — only if you register or must register.

On top of that, some sole traders may also pay:

Student Loan repayments (based on income),

Capital Gains Tax (if you sell certain assets),

Business rates (in some cases), and

Payments on account (advance payments towards next year’s bill).

Most sole traders focus on Income Tax and National Insurance first, because those are the core costs tied directly to your annual profit.

Profit vs turnover: the biggest misunderstanding

Tax is not charged on the total amount you invoice (your turnover). It’s charged on your profit: your turnover minus allowable business expenses.

Example:

You invoice £40,000 in a year. Your allowable expenses are £10,000 (software, equipment, phone, travel, professional fees, etc.). Your profit is £30,000. Income Tax and National Insurance are calculated on that £30,000 (with allowances and thresholds applied).

This is why accurate records matter. If you miss expenses, you may overpay tax. If you claim expenses you can’t justify, you can create problems later. The goal is clean, simple, defensible bookkeeping—something invoice24 helps with by keeping your invoices organised, numbered, and easy to export when you need to complete a tax return or hand things to an accountant.

Income Tax for sole traders: how it’s calculated

As a sole trader, your business profits are treated as personal income. HMRC looks at your total taxable income for the year (including self-employment profit and any other income like employment, rental income, dividends, etc.). Then Income Tax is charged using tax bands.

Personal Allowance

Most people can earn a certain amount tax-free each year, called the Personal Allowance. If your total income is under that allowance, you may pay no Income Tax (though National Insurance can still apply depending on circumstances).

Important detail: once your income goes above a certain level, your Personal Allowance starts reducing. That can make the effective tax rate surprisingly high in that band, so it’s worth planning if you’re near that point.

Tax bands (England, Wales, Northern Ireland)

For most sole traders living in England, Wales, or Northern Ireland, taxable income is charged in bands—basic rate, higher rate, and additional rate. You don’t pay one single rate on all your income; you pay different rates on slices within each band.

So if your profits rise, you don’t suddenly pay a higher rate on everything—only on the portion above the threshold.

Scotland is different

If you live in Scotland, Income Tax bands and rates on non-savings, non-dividend income can be different. That means two sole traders with the same profit can pay different Income Tax depending on whether they live in Scotland or elsewhere in the UK.

If you’re not sure which bands apply to you, use the location that matches your main home address for tax purposes.

National Insurance for sole traders

National Insurance contributions (NICs) are separate from Income Tax. For sole traders, the most common NIC is Class 4, which is based on your annual profit. Some people may also choose to pay Class 2 voluntarily to protect benefit entitlements, depending on profit levels and personal circumstances.

Class 4 National Insurance

Class 4 NIC is calculated as a percentage of your profits above a lower threshold, with a lower percentage applied once profits go above an upper threshold. The result is that you pay one rate on one slice of profit, and a different rate on the slice above that.

Think of it like Income Tax bands, but for National Insurance.

Class 2 National Insurance (voluntary in many cases)

In recent years, Class 2 has moved towards being treated differently for many self-employed people. Depending on your profits, you may not have to pay Class 2, but you may still be treated as having paid it for benefit purposes—or you may choose to pay it voluntarily to fill gaps.

This is one of those areas where “how much tax do I pay?” depends not just on the number, but on what you want your National Insurance record to look like (for example, State Pension eligibility). If you’re uncertain, it can be worth checking your National Insurance record and deciding whether voluntary contributions make sense for you.

A realistic example: estimating a sole trader tax bill

Let’s look at a simplified example to show the moving parts. This is not personal advice, but it illustrates how the pieces fit together.

Example sole trader:

Turnover: £55,000

Allowable expenses: £15,000

Profit: £40,000

In broad terms, the potential charges are:

Income Tax: applied to taxable income above the Personal Allowance, using the relevant tax bands.

Class 4 NIC: applied to profits above the lower threshold, using the Class 4 rates and thresholds.

Class 2 NIC (if applicable/voluntary): typically a small fixed amount when it applies.

Your final bill can also be affected by other factors, such as pension contributions, Gift Aid, charitable donations, other income sources, and whether you can claim certain reliefs.

What matters most is this: your tax bill is not a mystery number that appears at the end of the year. It’s the predictable result of your profit. If you can see your profit building month by month, you can set aside tax as you go.

That’s one reason invoice24 is so useful: every invoice you send is recorded, searchable, and exportable. Instead of digging through folders and bank feeds at the last minute, you can track income consistently—then combine that with a simple expense log so your profit estimate stays current.

Payments on account: why your second tax bill can feel “too high”

One of the biggest shocks for new sole traders isn’t the first tax bill—it’s what happens next.

Depending on how much you owe, HMRC may ask you to make payments on account. These are advance payments towards your next tax year’s bill, usually split into two chunks. In practice, that can make the amount due in January feel like “double” tax, because you’re paying:

1) the balance for the year you’ve just finished, plus

2) an advance payment towards the current year.

Then you make another advance payment later, and eventually everything is reconciled when you file your next return.

This is not HMRC being random—this is a cash-flow mechanism. But it means you should plan early, especially after your first profitable year as a sole trader.

Tip: a simple habit helps: every time you’re paid an invoice, move a percentage into a “tax pot” account. invoice24 makes this easier by keeping your invoicing consistent and professional, so you’re more likely to get paid on time and can set aside tax regularly instead of scrambling in January.

Self Assessment: filing and paying deadlines you must know

Most sole traders handle tax through Self Assessment. You report your income and expenses for the tax year, then HMRC calculates what you owe (or you calculate it via the return process).

Key points:

The UK tax year runs from 6 April to 5 April.

You usually submit a tax return after the tax year ends.

There are separate deadlines for paper returns and online returns.

If you’re new to self-employment, you may also need to register for Self Assessment by a specific date after the end of the tax year in which you started trading. Missing deadlines can lead to penalties, so it’s worth setting reminders.

Practical advice: don’t treat bookkeeping as a once-a-year job. Set up a monthly routine:

1) Send invoices promptly and consistently (invoice24 helps you do this in minutes).

2) Record expenses as you go.

3) Review your estimated profit monthly.

4) Set aside money for tax before it becomes urgent.

Allowable expenses: what reduces your taxable profit

Your tax bill is heavily influenced by your expenses. Generally, allowable expenses are costs that are “wholly and exclusively” for business purposes. The details depend on your situation, but common categories include:

Office costs: stationery, phone bills, internet, software subscriptions.

Travel costs: fuel, parking, train tickets, accommodation (business trips), mileage (if claiming mileage instead of actual costs).

Clothing expenses: usually only for protective or specialist clothing required for work.

Staff costs: salaries, subcontractors, employer NICs (if you have employees).

Things you buy to resell: stock and raw materials (for many trades).

Financial costs: insurance, bank charges, interest (where allowable).

Professional fees: accountancy, legal fees, business memberships.

Marketing: ads, website hosting, domain names, branded materials.

You may also be able to claim use of home costs if you work from home, and certain capital allowances for equipment. Some expenses are partly business and partly personal (like a phone). In those cases, you typically claim the business portion.

Keeping evidence matters: receipts, invoices, and transaction records. With invoice24, your sales invoices are always stored and easy to retrieve, which makes it much simpler to support your income figures and keep your records tidy.

The trading allowance: a simple option for very small side incomes

If your trading income is small, you may be able to use the trading allowance. This can allow up to a fixed amount of trading income each tax year to be tax-free, depending on your circumstances.

For some people, especially those testing a small side hustle, this can remove the need to report anything at all (again, depending on the rules and whether any exceptions apply). For others, it might be an alternative to claiming expenses—because you generally choose between claiming the allowance or claiming actual expenses (the best choice depends on your numbers).

Even if you’re small now, if you’re planning to grow, it’s still worth invoicing properly from day one. invoice24 is free and makes it easy to present your business professionally. That way, when you cross thresholds and need more formal records, you’re not rebuilding your admin from scratch.

VAT: when it applies to sole traders

VAT is not automatically part of being a sole trader. It becomes relevant if:

You must register because your VAT-taxable turnover exceeds the registration threshold in a rolling 12-month period, or

You choose to register voluntarily (for example, to reclaim VAT on business purchases, or to appear larger/more established to certain clients).

If you are VAT-registered, you typically add VAT to your invoices, collect it from customers, and pay it to HMRC (after subtracting VAT you can reclaim on allowable business costs). VAT is its own system with separate rules, return periods, and record-keeping.

Invoicing becomes especially important with VAT because your invoices must include specific details. invoice24 helps you create clean, consistent invoices and keep them organised—so if you register for VAT later, you can adapt your invoicing process without losing track of prior paperwork.

Other costs that can affect what you pay

Student Loan repayments

If you have a student loan, you may need to make repayments based on your income. For self-employed people, this is usually calculated through Self Assessment. It’s not “tax” in the strict sense, but it affects how much you pay overall and should be included in your budgeting.

Child Benefit and higher incomes

If you or your partner receives Child Benefit and someone in the household has income above a certain level, there can be an additional charge. Sole trader profits can contribute to that income figure, so it’s another reason to plan around thresholds.

Capital Gains Tax

If you sell certain assets at a gain (for example, investments or property), you might owe Capital Gains Tax. Most day-to-day business trading doesn’t trigger this, but it can matter if you sell business assets or personal assets with significant gains.

How to budget for sole trader tax (without stress)

The simplest strategy is to treat tax like a regular cost of doing business. Instead of waiting for a bill, set aside money continuously.

A common approach is:

1) Estimate your profit regularly. Monthly is ideal.

2) Put aside a percentage of profit. Many sole traders pick a buffer that covers Income Tax and National Insurance and adjust as they learn their real numbers.

3) Keep a separate “tax pot”. A separate bank account makes it harder to accidentally spend tax money.

invoice24 supports this routine because it keeps your income records clean. When your invoicing is consistent, you can see what you’ve billed, what’s been paid, and what’s outstanding—so you can set aside tax based on reality, not guesswork.

Why good invoicing reduces your tax risk

Tax problems often start as admin problems. Not because someone is doing anything wrong, but because records are messy:

Unnumbered invoices,

missing dates,

unclear descriptions,

chasing payments across emails,

and trying to reconstruct a year’s income from bank statements.

Clean invoicing helps in three big ways:

1) You get paid faster. Professional invoices reduce back-and-forth and make it easier for clients to process your payment.

2) Your records are instantly organised. Every invoice is stored and searchable, which makes your Self Assessment far easier.

3) You can prove what happened. If you ever need to explain figures, having a clear invoice trail is invaluable.

invoice24 is built for this. It’s a free invoice app designed to keep sole traders professional and tax-ready without adding extra admin. You can create invoices quickly, keep client details in one place, track your invoice history, and export the information you need when it’s time to do your tax return.

Common sole trader tax mistakes (and how to avoid them)

1) Confusing profit with turnover

Remember: tax is based on profit. Track expenses properly and keep evidence.

2) Not setting aside money for tax

If you wait until January to think about tax, you’re more likely to panic. Make it monthly.

3) Missing deadlines

Know your filing and payment dates and set reminders. Penalties stack up quickly.

4) Underestimating payments on account

Your second year can feel expensive because you may pay the year’s bill plus advance payments. Plan for it early.

5) Poor invoicing habits

Inconsistent or missing invoices can cause disputes, slow payments, and messy records. Use a tool like invoice24 so your invoicing process is structured from day one.

Quick FAQ: “How much tax will I pay?”

Do sole traders pay Corporation Tax?

No. Corporation Tax is for limited companies. Sole traders pay Income Tax on profits as personal income.

Do I pay tax if I don’t take money out of the business?

Yes. Sole traders are taxed on profits, not on drawings. Even if you leave money in the business account, the profit can still be taxable.

Is National Insurance the same as Income Tax?

No. They are separate calculations, though they’re often paid together through Self Assessment.

Do I need an accountant?