Keep a clear record of every personal withdrawal.
Separate personal spending from business transactions.
Set aside funds regularly to meet tax obligations.
🏦 Why You Need a Business Bank Account as a Sole Trader
Although it’s not a legal requirement for sole traders to have a separate business bank account, it’s highly recommended. Using one makes bookkeeping, tax returns, and expense tracking much easier.
Without a business account, separating business purchases from personal ones becomes difficult—leading to confusion during your Self Assessment tax return.
In fact, most personal bank account terms prohibit using them for business purposes, so opening a dedicated sole trader bank account keeps you compliant and organised.
📊 How Much Should You Set Aside for Tax?
Because you pay tax on your profit, not your turnover, it’s vital to plan ahead. Use the guide below to estimate how much tax you might owe and set that money aside in a savings account or tax pot.
Annual Profit Suggested Tax Set Aside
Up to £50,000 25%
£50,001 – £100,000 40%
£100,001 – £150,000 45%
Over £150,000 45%+
These percentages include Income Tax and National Insurance, but not Payments on Account (more on that below).
🧾 Reporting Profits and Paying HMRC
Every sole trader must file an annual Self Assessment tax return to declare business profits. Your final tax bill includes:
Income Tax
Class 2 and Class 4 National Insurance
Key deadlines:
31 January – File your Self Assessment and pay any tax owed for the previous tax year.
31 July – Pay your second Payment on Account, if applicable.
If your tax bill exceeds £1,000, HMRC will require Payments on Account—advance tax payments based on your prior year’s bill. If you expect lower profits in the coming year, you can apply to reduce these.
🧮 Understanding National Insurance for Sole Traders
As a sole trader, you may pay two types of National Insurance:
🔹 Class 2 NICs (2024/25: £0/week)
Only due if profits exceed £6,725 per year.
Can be paid voluntarily if under the threshold.
🔹 Class 4 NICs
6% on profits between £12,570 – £50,270
2% on profits above £50,270
These contributions are automatically calculated and included in your Self Assessment. If you’re also employed, your Class 1 NICs (from your payslip) remain unaffected.
💡 What If You Have Other Income?
If you earn money from employment, dividends, or rental income, you must declare all income sources in your Self Assessment. HMRC will use your combined earnings to calculate your total tax liability.
Your employer will issue a P60 showing PAYE deductions, and any dividend income must be entered separately to determine if additional tax is due.
🧾 Can I Claim Business Expenses as a Sole Trader?
Yes! As a sole trader, you’re allowed to deduct business expenses from your income to calculate your taxable profits. These costs must be incurred “wholly and exclusively” for business purposes.
Examples of allowable expenses:
Office supplies
Business travel
Marketing costs
Phone and internet (business portion)
Want to learn more? Check out our guide on allowable expenses for sole traders to make sure you’re not overpaying on your tax.
📌 Key Takeaways for Sole Traders in the UK
Pay yourself via drawings from your business.
Maintain separate business and personal finances.
Keep accurate records for income, expenses, and drawings.
File your Self Assessment before 31 January each year.
Set aside 25–45% of profits for tax and NICs.
Open a business bank account to simplify accounting.
Use accounting software to manage your finances with confidence.