Sole Trader Taxes and Allowances Explained: What You Need to Know

How much National Insurance does a sole trader pay?

Class 2 NICs explained

Sole traders pay Class 2 National Insurance Contributions (NICs) if their profits are above a certain threshold. These are usually a flat weekly amount (currently a few pounds per week). They count towards benefits like your state pension.

I once had a client who was pleasantly surprised — she thought she’d missed out on state pension years, but her Class 2 NICs meant she was fully covered.

Class 4 NICs explained

You’ll also pay Class 4 NICs on profits above a higher threshold. These are calculated as a percentage of your profits, similar to Income Tax.

When payments are due

Both Class 2 and Class 4 NICs are paid as part of your Self Assessment tax bill, due 31 January each year (with possible payments on account in July).

What tax rate do sole traders pay?

Personal allowance and thresholds

Every sole trader has a personal allowance (currently £12,570), which means you can earn that amount before paying any Income Tax.

Income tax bands for sole traders

Above the allowance, profits are taxed at the standard rates:

• 20% basic rate (up to £50,270).

• 40% higher rate (up to £125,140).

• 45% additional rate (over £125,140).

How profits affect your tax bill

If your profits rise, your tax rises too. Unlike a limited company, you can’t leave profits in the business to be taxed later. I often recommend sole traders set aside 25–30% of their profits in a separate account for tax — it avoids nasty surprises come January!

Do sole traders get a personal allowance?

Current allowance amounts

Yes — every individual in the UK has a personal allowance (£12,570 for most people).

When the allowance is reduced

If your income exceeds £100,000, your allowance reduces by £1 for every £2 you earn. I once worked with a consultant who was shocked to discover she had no personal allowance left once her income hit £125,140. Planning ahead can save thousands in this situation.

Other allowances that may apply

Don’t forget the trading allowance (£1,000) and the dividend allowance (if you also own shares in a company). These can reduce your overall bill.

When do I have to start paying tax as a sole trader?

The self-assessment timeline

You register with HMRC, keep records, and then file a Self Assessment tax return after the end of each tax year (5 April).

First tax return deadlines

Your first return is due by 31 January following the end of the tax year. For example:

• Start trading: July 2024.

• Tax year ends: 5 April 2025.

• Tax return and payment deadline: 31 January 2026.

Payments on account explained

If your tax bill is more than £1,000, HMRC may ask for payments on account — essentially an advance payment towards next year’s bill. This often catches people out. I’ve seen many sole traders panic when their “first tax bill” was almost double what they expected. The solution? Budget early and set aside money regularly.

Do sole traders pay corporation tax?

Corporation tax vs income tax

Sole traders don’t pay Corporation Tax. That’s reserved for limited companies. Instead, sole traders pay Income Tax and NICs on their profits.

Why sole traders are exempt

Because as a sole trader, you and your business are legally the same entity. Companies, on the other hand, are separate legal bodies and therefore taxed differently.

When corporation tax applies (for companies)

If you ever incorporate, your profits will be taxed at the Corporation Tax rate (currently 25%) instead of personal Income Tax rates.

Can I split my income with my spouse as a sole trader?

HMRC rules on income splitting

You can’t simply “split” income with your spouse to reduce tax. HMRC expects profits to belong to the sole trader who earned them.

Spouse employment in your business

However, you can employ your spouse in your business if they genuinely work for you. Their wages are deductible as a business expense, but must be reasonable for the work done.

Tax benefits and risks

Done properly, this can reduce your household tax bill. Done incorrectly (e.g., paying a spouse £30,000 to do occasional admin), it can trigger HMRC enquiries and penalties.

Final thoughts

Understanding tax as a sole trader isn’t about memorising rates — it’s about planning ahead. Keep good records, set aside money for your bill, and take advantage of allowances where possible.

At Cannon Accountants, we specialise in helping sole traders take the stress out of tax. Whether it’s your first Self Assessment or you’re weighing up whether to switch to a limited company, we’re here to help.

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