Sole Trader Tax Calculator:

How to Easily Work Out Your Tax and National Insurance

Tax can be complicated, right? In fact, it’s so nuanced that there’s an entire accountancy profession dedicated to understanding and applying its complex rules. That’s a lot to keep up with if you’re a small business owner.

At takepayments, we decided to make this all a tad easier. We’ve built a quick and easy tax calculator designed for sole traders and small businesses in the UK to get a snapshot view of the tax they should be paying.

All you need to do is throw in a few top-level details about your business (revenue, profit, etc.) and our handy calculator will give you an estimate of your tax and NI bill. It’ll even break it down into annual and monthly payments for you.

How our business tax calculator works

The calculator uses data you provide to work out your business:

1. Annual profits

2. Monthly profits

3. Annual tax estimate

4. Annual National Insurance estimate

Here’s how these calculations work:

Annual profits — This is calculated by taking your total annual business income and subtracting; your marketing costs, your spend on products and stock, your phone and broadband costs; your premises bills (i.e. rent, gas, electricity), your travel costs, your annual pension contributions and other allowable expenses.

Monthly profits — This is calculated simply by dividing your annual profits by twelve. 

Annual tax estimate — You’ll fall across up to three tax brackets depending on your earnings.

Annual National Insurance estimate — Similar to your tax estimate, this is calculated based on your earnings across different brackets.

How does sole trader tax work?

The UK tax system works on a self-assessment basis for sole traders. This means you're responsible for reporting how much profit your business makes and the amount you’ve incurred in expenses via your annual Self Assessment tax return. Your tax return for the previous tax year must be reported to HMRC. Then, you must pay your bill by the 31st of January, ahead of the start of the next tax year.

To work out your tax payments, you’ll need to keep records of all your income and subtract any allowable expenses you’ve incurred. These must be purely business expenses – think travel costs, office expenses like lighting and heating bills, and paid training courses – and can’t include personal expenditures. 

And most importantly, you must make sure that you’re setting aside enough money to cover your tax bill when the time comes.

How much can a sole trader earn before paying tax?

In the UK, the current personal allowance for sole traders lets you earn up to £12,570 before you need to pay any Income Tax (correct as of March 2024 for the 2024/25 tax year). 

How much tax does a sole trader pay?

As a sole trader, your tax rate and the amount you pay depend on your annual profits. The UK tax system is progressive, meaning you'll pay more tax the more you earn. 

There are four tax brackets that range from 0-45%. Here are the sole trader tax rates in a bit more detail (correct as of March 2024 for the 2024/25 tax year):

  • 0% Tax rate – For profits up to £12,570, you're in the clear. This is your personal allowance, where you pay no Income Tax.
  • Basic rate (20%) – For profits between £12,571 and £50,270, you'll pay a 20% tax rate. This is where most small businesses land.
  • Higher rate (40%) – Earnings between £50,271 and £125,140 fall into this bracket.
  • Additional rate (45%) – For the high earners with profits over £125,140.

If you earn taxable income from other sources besides your sole trader business, this must also be included as part of your profit and count towards your total taxable income amount.

What other tax does a sole trader have to pay?

Along with Income Tax, you're also on the hook for National Insurance Contributions as a sole trader. These contribute to your state benefits, like the State Pension, and are also worked out based on how much profit you make:

  • Class 2 NIC: For profit above £12,570 – A fixed rate was previously applied, but starting April 2024, this changes. Instead, you'll pay a percentage of your earnings, aligning closer with how Income Tax works.
  • Class 4 NIC: For profit from £12,570 to £50,270 – A 6% rate applies here, covering the majority of sole traders.
  • Class 4 NIC: For profit over £50,270 – Anything over this threshold is taxed at 2%.

Do sole traders have to register for VAT?

Sole traders must follow the same VAT rules as other types of businesses, meaning they must register if their taxable income exceeds the VAT registration threshold. From the 1st of April 2024, the VAT threshold for sole traders and small businesses will be increased to £90,000.

Sole traders below the threshold don’t need to register for VAT, but they can do so voluntarily to reclaim VAT from qualifying expenses.

Read more about voluntary registration here.

How to budget for your annual tax and National Insurance costs

Once you know how much you can expect to pay on your taxes and National Insurance, it’s simpler to know how much you need to set aside. 

But when you’re a sole trader business, saving is easier said than done.

Luckily, there are a few practical ways you can plan ahead to ensure you’re not left out of pocket — and you can still see your business grow, whatever the circumstances.

1. Look into discounted business rates

Business rates are taxes applied to commercial properties, like pubs, shops and offices. If you have a business premises and you’re looking for ways to cut costs, you might be eligible for discounted rates thanks to the UK government’s business rates relief schemes.

There are multiple relief schemes on offer. They include everything from relief for charities to exemptions for certain types of buildings. For more information, see our guide to business rates and relief schemes.

2. Overestimate your costs

Ever got a bill that was higher than expected? You can help set aside enough cash to cover these instances by overestimating your annual spend by 10%. 

Adding in a small buffer like this allows you to take unforeseen financial hits without going beyond your budget. Over time, you’ll develop a keener eye for costs that tend to land higher than you estimate, and create contingency plans for them.

3. Be ready to switch

While loyalty is valuable in your personal relationships, it can cost your business if you’re not careful. The market price of things like energy, broadband and insurance constantly fluctuates, so if you’re not comparing these things at least annually, you could be missing out on significant savings. 

The same goes for payment providers. Make sure you’re not being stung by hidden fees and high transaction costs; get quotes from other providers to see where your rates are compared with larger businesses. 

4. Negotiate

While not everything is up for negotiation, there’s occasionally wiggle room with suppliers to help you get more favourable rates in return for repeat custom — you just need to ask!

For example, if you’re renting your premises and your rates suddenly go up, you might be able to negotiate a lower monthly rental fee by agreeing to sign on to a longer-term agreement. The benefit to your landlord is that they won’t risk losing revenue for a few months between tenants — and will probably be willing to sacrifice a bit of income for that guarantee. 

For more information, check out our top budgeting tips for small businesses.

Need more advice?

Looking for some more advice? At takepayments, we provide our business customers with plenty of support to help with their payments and budgeting. We assign all our customers a personal advisor for the first six months of their contract with us to make sure they get off to a flying start.

Learn how takepayments can help your business thrive with card machines, POS systems and online payment solutions today.

You can also find more tools and resources from our team:

- EBITDA calculator

- Consumer Spending Index

- Tipping in the UK: Consumer Attitudes Survey

Card Machine Glossary for Small Businesses

Chat with us!