How to Pay Yourself as a Sole Trader and Set Aside Money for Tax

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How to Pay Yourself as a Sole Trader and Set Aside Money for Tax

As a sole trader, you’re self-employed, meaning you don’t receive a salary or wage in the traditional sense. Instead, you pay yourself through personal withdrawals from your business. You’ll also be responsible for your own Income Tax and National Insurance Contributions (NICs), which are based on your business profits.

It’s crucial to keep accurate records of any personal drawings to ensure your bookkeeping remains clear and to help with tax calculations. Since tax is paid on your profits, setting aside money throughout the year will make it easier when your Self Assessment tax bill is due.

How Do You Pay Yourself as a Sole Trader?

Paying yourself is simple: you withdraw funds from your business bank account for personal use. While it’s not legally required, using a dedicated business bank account is highly recommended. Keeping a record of these transactions, along with other income and expenses, will make financial management and tax reporting much easier.

Since you’ll need to cover your tax liabilities, it’s wise to set aside a portion of your income in a savings account so it’s readily available when needed.

Why You Should Have a Business Bank Account

Organising your finances is crucial when running a business. While it might seem easier to use a single account for both personal and business transactions, it can quickly become confusing when reviewing bank statements at tax time.

Having a separate business account helps you:

Clearly distinguish personal and business expenses
Avoid potential issues with HMRC
Maintain accurate financial records

Many banks require a business account for commercial transactions, and while some charge monthly fees, introductory offers often include a period of free banking.

How Much Should You Set Aside for Tax?

Your tax liability is based on your business profits, calculated as income minus allowable business expenses. To ensure you have enough to cover your tax bill, we recommend setting aside the following percentages:

Annual Profit	Suggested % for Tax
Up to £50,000	25%
Up to £100,000	40%
£100,000 – £150,000	45%
Over £150,000	More than 45%

These figures account for Income Tax and National Insurance contributions, but individual circumstances may vary.

Do I Own All the Money in My Business?

As a sole trader, there is no legal distinction between you and your business. All income generated belongs to you, but you’re also responsible for covering expenses, tax, and any liabilities. Since there can be a gap between earning income and paying taxes, careful planning is essential.

What If I Have Other Income Sources?

If you earn income from employment or dividends alongside your self-employed business, you’ll need to report all sources on your Self Assessment tax return. Employers deduct Income Tax and NICs through PAYE, and you can find these deductions on your P60 form at the end of the tax year. Any additional tax owed will be calculated as part of your Self Assessment.

Reporting Profits and Paying Tax

Each year, you must report your profits to HMRC via your Self Assessment tax return, which is due by 31st January. If your tax bill exceeds £1,000, you’ll need to make Payments on Account—advance payments towards your next tax bill, due on 31st January and 31st July.

If your profits decrease, you can request a reduction in your Payment on Account by contacting HMRC or speaking to your accountant.

National Insurance for Sole Traders

National Insurance contributions for self-employed individuals differ from those for employees:

Class 2 NICs: If your annual profits exceed £6,725, these are usually required, but from 2024/25, they are being phased out.
Class 4 NICs: If you earn over £12,570, you’ll pay:
- 6% on profits between £12,570 and £50,270
- 2% on profits over £50,270

What Business Expenses Can I Claim?

One of the advantages of being self-employed is that you can deduct allowable business expenses before calculating taxable profits. These must be wholly and exclusively for business purposes. Claiming legitimate expenses reduces the amount of tax you owe, but it’s important to understand which costs qualify.

Expenses Guide

Need Help Managing Your Finances?

Managing your tax responsibilities can feel overwhelming, but Jaccountancy is here to help. We offer expert advice, bookkeeping support, and guidance on tax-efficient ways to manage your business finances.

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