How much should i set aside for taxes as a sole proprietor

Q: What can I write off as a sole proprietor?

Expenses Sole Proprietorship Companies Can Write Off.

Once you’ve been working for yourself for a while and have started to make a bit of money, you might think to yourself ‘how much money should I set aside to pay my personal tax bill?’

Table of Contents Show

How do I pay myself as a sole trader?
Now that I work for myself, how do I pay taxes?
Isn’t all the money in the business mine?
What happens if I also have earnings from employment or dividends?
How is my profit reported to HMRC and how do I pay my taxes?
Webinar: What Taxes Do I Pay as a Sole Trader?
Q&A - Tax and NI as a sole trader
Q&A: Setting up as a sole trader
Q&A: Expenses as a sole trader
Q&A: Becoming a client
What can I write off as a sole proprietor?
How much tax should I put aside?

This is a great mindset to be in if you already are! One of the most manageable ways to handle your tax bill is to put some money aside each month, so that you end up with a pot for this very purpose when that tax bill comes in.

Being self-employed often feast or famine. You’re run off your feet, then the next minute you’re drumming your fingers on the table while you watch tumbleweed drifting past your window.

In a busy year, you might be tempted to pay yourself a bit more or take a lump of money from the business to reward yourself for all your hard work.

But if you haven’t put any of that money aside for tax, you might find that that BIG old tax bill from your feast year hits in a quiet spell.

Trying to pay off that high tax bill when you’re bringing in even less than usual can put a massive strain on your cashflow, on your business, and on you.

So how much should I put aside for tax?

You’ll hear a lot of people saying you need to keep 30% of your earnings aside for tax. And if you break it down, you’ll see that this makes sense.

Basic rate tax is charged at 20%, and National Insurance at 9%. That means, if you’re saving 30% of your earnings, you’re reserving just a little over basic rate tax plus National Insurance.

And when you factor in adjustments for your personal allowance and your expenses, you should come out just about right. You may even find you’ve saved a little bit too much, but that will be very welcome if you’re hit by a Payment on Account request from HMRC (when you pay six months of the following year upfront).

And ifyou’re not asked for Payment on Account, it’s time to put it towards a holiday! Or invest it sensibly in the business. Either way, it’s put to good use.

But…saving 30% for tax doesn’t make sense for every business

There are three scenarios where saving 30% for tax just doesn’t work:

When your income isn’t all that high
If you have additional income
Your business has a lot of purchases and expenses.

Saving for tax when your income isn’t all that high

Saving 30% only makes sense once you reach a certain threshold, and there are plenty of businesses who don’t meet that threshold. Perhaps you’re still in the start-up phase and haven’t built up your business yet.

Maybe you freelance part-time to fit around the kids, rather than full-time. Or you might have taken a chunk of time off for maternity leave, paternity leave, travelling… you get the idea.

If you know you’re likely to earn less than £13,000, you should find that setting aside 10-15% of your earnings to cover your tax bill is more than enough. And any extra will help if you’re landed with an unexpected Payment on Account bill from HMRC.

Dealing with tax on your freelance earnings when you have additional income from elsewhere

Calculating how much to save for tax if your business has quite a few purchases and expenses.

If your freelance business provides a service, like graphic design or copywriting, you will have some expenses, but overall, you’ll take home a large part of what you charge your clients.

But that’s not the case for online shops and businesses which rely on buying large numbers of supplies to make their products or deliver their services.

Let’s say that you sell an item of jewellery or a piece of furniture for £100, and it cost you £50 in materials to make it. If you put aside 30% of your earnings, that’s £33 of that £100 straight into your tax pot.

Take out another £50 to cover the materials, and you’re left with just £17 to pay the rest of your business costs (rent, insurance, travel, bills, fees for PayPal, Etsy, Not-On-The-Highstreet…) and you have to try to live off some of that £17 as well. That’s not much when you started with £100.

The thing is, the costs of your materials count as deductible expenses. That means you’d only need to save 30% of what you’ve earned after taking off the expenses.

If you use accounting software, you can work this 30% out by looking at your net profit after expenses and saving 30% of that figure.

If you’re not doing regular bookkeeping, it’s likely you’ll still know how much it costs you to make each item, so you can work out how much is left after expenses and set aside 30% of that.

Saving about 30% for tax is right for lots of people, but not for everyone. To discuss this further and to get help with your bookkeeping and taxes, contact us here at The Hollies!

As a UK sole trader, you’re not directly employed and you don’t receive a salary or wage in the traditional sense. So how do you pay yourself as a sole trader and then pay any tax due? You pay yourself based on personal drawings from the business, and you pay Income Tax and National Insurance Contributions based on the profits your business makes.

So, it’s important to keep a record of any personal drawings you take from the business to pay yourself. This helps you to keep on top of your bookkeeping and helps when calculating your profits, as eventually, you pay tax on your profits. You’ll also need to put some money aside to pay your tax bill when you submit your annual Self Assessment.

If you’re a limited company director the situation is different and you should read our article “How much should I take as a salary?”

How do I pay myself as a sole trader?

You can simply take money from your business account to pay yourself as a sole trader. We strongly recommend that you use a separate business bank account for your sole trader finances.

You need to make sure that you keep a record of these drawings, along with any other incomings and outgoings. We've got an article about the importance of good bookkeeping with some handy hints and tips.

Don't forget though, you need to put some money aside to pay any tax you owe. It should be easily accessible, but you could always put it into a savings account to earn interest until you pay it to the taxman.

Now that I work for myself, how do I pay taxes?

As a UK sole trader, you pay taxes based on the profits that your business makes through your annual Self Assessment tax return. Essentially, your profit is the income that your business receives, minus the allowable sole trader business expenses incurred.

These expenses must be purely for business, and must not include any personal expenditure.

Obviously, the higher the amount of profit you report, the more you’ll earn and the greater your tax liability will be. We recommend you set aside the following amounts from your regular drawings to settle your Income Tax and National Insurance liabilities each year:

Profits per annum	% set aside for tax
up to £50,000	25%
up to £100,000	40%
between £100,000 and £150,000	45%
over £150,000	45%

We explain more in our sole trader webinar and Q&A at the bottom of this article.

Isn’t all the money in the business mine?

When you’re a sole trader, as far as the law is concerned, there’s no legal difference between you and your business. You receive the income and pay the expenses, including the tax liability which you must pay as an individual. This can be tricky to manage because there can be a time lag between receiving income from your customers and paying the personal tax you owe on your business profit. We’ve got an article that explains the taxes you may need to pay as a small business.

What happens if I also have earnings from employment or dividends?

If you have income from employment as well as your self-employed income, you’ll need to declare it on your annual Self Assessment tax return. Your employer should have deducted the income tax and National Insurance due through the Pay As You Earn (PAYE) scheme.

You can see this information on Form P60, which your employer must give you at the end of the tax year. You include the income tax deducted by your employer on your Self Assessment for the same tax year and HMRC will calculate any additional income tax or Self-Employed National Insurance due.

Similarly, if you receive any dividends from a company or other income (such as from property), you must include these on your Self Assessment and HMRC will calculate the tax you owe.

Our Knowledge article “Freelancing on the side: what tax do I pay?” has further details including some worked examples.

How is my profit reported to HMRC and how do I pay my taxes?

Your profits are reported to HMRC each tax year via your Self Assessment Tax Return. Your income tax and NICs (National Insurance Contributions) calculation will highlight how much you’ll be paying on your final tax bill. Your Self Assessment must be filed and all taxes you owe must be paid before the 31st January each year. Otherwise, HMRC will fine you, with penalties starting from £100.

If your tax bill is more than £1,000 for the year, you’ll be required to make a Payment on Account. This is HMRC’s way of ensuring tax is paid regularly and it goes towards your next Self Assessment. There are two payments made towards the Payment on Account: the first must be made by 31st January and the second payment is due on or before the 31st July each year.

If you believe that you won’t have as much sole trade profit in the next tax year, you should speak to HMRC (or your accountant if you’re with Crunch) and you may be able to reduce your Payment on Account to HMRC.

Even though things are slightly simpler for a sole trader than a for a limited company, you might still find it’s easier to use online accounting software to keep track of all this and prepare and file your Self Assessment. With Crunch, you’ll also get unlimited support from a team of client managers and advice from expert accountants. Find out more about our accounting for sole traders packages.

Webinar: What Taxes Do I Pay as a Sole Trader?

Join our expert Ben Schaefer for a jargon-free explanation of what taxes you’re expected to pay as a UK sole trader.

Download the webinar slides

Q&A - Tax and NI as a sole trader

Q: If you have a small side business (making, say a few hundred pounds a month) at what point do you need to inform HMRC that you setting up as a sole trader to declare additional income?

We’ve got an article about freelancing on the side that explains it all. In short, you should register as self-employed as soon as you receive any income that is not taxed at source – but you may not need to pay any tax on that sole trader income until you earn over £1,000 in a single tax year. Any tax or National Insurance due would be calculated and paid through your annual Self Assessment.

Q: Can you go over the annual dates that Self Assessment needs to be filed by each year? And, is there help to complete a Self Assessment form?

Yes of course, our article “Do I have to complete a Self Assessment?” covers it all.

To summarise:

Tax years run from 6th April to 5th April each year
You need to register for Self Assessment by the 5th October after the end of the relevant tax year where you had any sole trade income
You have to file your Self Assessment and pay any tax due by 31st January after the end of the tax year it applies to
If this is not your first Self Assessment, you may also need to make a Payment on Account by 31st July if your last Self Assessment bill was more than £1,000.

We’ve got an article and a downloadable business guide on how to complete your Self Assessment. This is one of the reasons an online accounting system with apps for recording mileage, expenses and importing bank statements and transactions can be so helpful.

The Crunch Sole Trader Accountancy service has all this and even prepares and submits your Self Assessment for you from just £29.50 +VAT per month.

Q: If your sole trader profits don’t exceed £6,365 then do you still pay any National Insurance (NI) on your sole trader profit, or if I have understood correctly, there is no NI to take off this portion in that situation?

As above, you need to make sure you’re registered as self-employed and complete an annual Self Assessment; HMRC will then let you know what Income Tax and National Insurance you need to pay.

Our article on self-employed National Insurance also explains how much and when you pay NI. If your sole trader profits are below the Small Profits Threshold (£8,365 in 2019/20) then you will not pay any self-employed NI.

Q: I thought Class 2 was part of the yearly Self Assessment as HMRC got rid of the monthly DD (or quarterly/half-yearly)?

Class 2 National Insurance is calculated weekly but is paid as part of your annual Self Assessment – you do not need to set up a monthly Direct Debit to pay Class 2 NI contributions separately.

Q: If you are completing a Self Assessment to declare additional income from a rental property, are you classed the same as a sole trader with the additional NI class or not?

No, if you are only declaring rental income this is not classed as sole trader income, so you will not pay self-employed National Insurance on this income.

Q&A: Setting up as a sole trader

Q: If at some point you want to change your business name, how do you do this? Is it complicated?

It’s fairly simple if you’re a sole trader. You just need to update any templates you use for invoices etc. and let your clients know. You may need to update websites or any business listings too. There are rules about the name you choose for your business – we cover these in our ‘What is a sole trader?” article.

If you decided to work through a limited company then changing the name of your business is a bit more complicated, as you need to let Companies House and HMRC know. We cover all this and more in our “Choosing a great company name” article.

Q: Do you need any insurance as a graphic design sole trader freelancer?

Ideally, yes. Small Business Insurance can protect you, your business, or your clients from the unexpected. Even if you don’t work in-house or have any employees, Professional Indemnity Insurance offers protection for your business against a customer suing you for a financial loss that they believe you caused through negligent advice and services.

Q: If you have started your freelance by using one personal account and then moved the business finances across to a business account thereafter, how do you list this in your tax accounts?

Ideally, you should have at least been using a separate personal account for the business income before you set up a business bank account. Either way, you need to declare any income as a sole trader and have receipts for any expenses to wish to claim as a sole trader. You’ll need to keep copies of your invoices, receipts and any relevant bank or credit card statements (personal or business) for up to six years.

Q: I’m employed part-time 3 days per week, in the higher tax bracket, and am already doing Self Assessments. I started 1 day per week contract work as a sole trader with limited revenue. Should I still be putting 25% aside to cover tax from sole trader work, or will it end up being taxed at the same rate as my PT employment?

A: In this situation, you should probably put aside 40% to cover your sole trader income, as you will already have used up your personal allowance and the Basic rate band.

Q&A: Expenses as a sole trader

Q: If I work as a consultant from home, can I offset any business expenses as a sole trader (like electricity bills etc)?

The simple answer is yes, there are a number of expenses you can claim when working from home.

We’ve got an article about working from home and the expenses you can claim. It’s slightly complicated, and it depends on whether you’re set up as a limited company or as a sole trader. As a sole trader, you also have a choice over how you claim your expenses, either using “simplified expenses” to claim a flat rate, or claiming a proportion of your household bills.

Q: Can your fees be charged as expenses?

Yes, business accountancy fees can be claimed as an allowable expense.

Q&A: Becoming a client

Q: How do I come onboard as a client?

You can just give us a call on 0333 242 8973 to speak to one of our friendly advisors, or you can arrange a callback. The short call will help you to decide on the right package for you, make an initial payment, and then we can have you up and running with Crunch in as little as a few hours.

Q: How do I apply for a Crunch mortgage?

Just call our Crunch Mortgage advisors on 03300371671 or arrange a callback and our Crunch mortgage advisers will be able to help you find the right mortgage for you.

Q: Can Crunch help me to determine whether I should operate as a limited company or a sole trader?

A: Absolutely! Our advisors are here to assist with making these sorts of decisions and will listen to your circumstances so that we’re able to provide you with tailored advice that’s suitable for you and your situation. We’ve also got a great article to help you decide whether operating as a sole trader or limited company is best for you.

Q: How do I set up a limited company if I decide to become one?

A: It’s really simple, and you can either do it yourself in minutes on our Crunch Formations site, or we can do it for you if you become a Crunch client. If you go down the DIY route, we’ll even refund the fee if you decide to become a Crunch client. Our article on setting up a limited company has all the information you need, or you can talk to one of our advisers.

Q: How should I estimate my income/turnover?

A: At its simplest, base it on your day rate and how many days a week (and weeks per year) you’ll be working – factoring in any expenses you’ll have. Our simple take-home pay calculator can help (it will also show whether you’d be better off as a sole trader or a limited company). If you want to get more detailed, then you may want to take a look at our cash flow forecasting spreadsheet.

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What can I write off as a sole proprietor?

Expenses Sole Proprietorship Companies Can "Write Off".

Office Space. DO deduct for a designated home office if you don't also have another office you frequent. ... .

Banking and Insurance Fees. ... .

Transportation. ... .

Client Appreciation. ... .

Business Travel. ... .

Professional Development..

How much tax should I put aside?

Prepare to pay tax by setting aside money in a separate bank account and generally aim for at least 20 to 35% of your income, depending on whether you charge GST. Following these tips will allow you to set a personal budget, prepare yourself for retirement and meet your tax obligations as an individual.