If you’re a sole trader, you may be wondering how to work out your tax without knowing your income.
Sole traders usually have the freedom to set their own hours, choose their own clients, and direct their own growth.
But these freedoms come with responsibilities. The need to save money to pay off the taxman at the end of each financial year can be a heavy burden, especially since it can be hard to work out your annual income.
Just follow these steps to ensure that you can effectively estimate how much you’ll need to set aside.
Plan your growth
You might not know what your exact income will be for the year, but you can do your best to come up with a sensible projection.
At the start of each financial year, take the time to estimate your earnings. Evaluate how your income grew or fell during the previous financial year, then consult your business plan to predict any future changes.
It often helps to predict income month-by-month instead of annually during this process.
Understand the tax brackets
The first thing you’ll need to do once you’ve estimated your monthly income is get to know the tax brackets. Sole traders must work according to the following brackets:
- Income from £0 – £11,000: no tax is paid.
- Income between £11,000 – £32,000: the basic income tax rate of 20% is paid.
- Income between £32,001 – £150,000: the higher income tax rate of 40% is paid.
- Income over £150,000: the additional income tax rate of 45% is paid.
Using these brackets alongside your financial projections will allow you to roughly work out your tax costs.
For example, you’ll need to save 20% of your profits over £11,000 for income tax if you expect to make £30,000 per year.
Take National Insurance into account
One of the major mistakes that sole traders make is failing to take National Insurance contributions (NICs) into account.
These contributions will be worked out alongside your income tax, and failing to account for them may see you saving far too little for the taxman.
Currently, sole traders will need to pay:
- £2.80 per week for Class 2 NICs
- Around 9% of your earnings between £8,060 and £43,000 and 2% on any profits above £43,000 for Class 4 NICs
One final thing to consider is that some sole traders will need to register for Value Added Tax (VAT). You’ll only need to do this if your business has a turnover of more than £83,000 over a 12-month period.
How to work out your tax without knowing your income: a summary
Ultimately, hiring an accountant is the best thing a sole trader can do to make sure they end each financial year with enough money saved to pay the taxman.
An accountant will be able to look over your books on a regular basis, providing advice to ensure you’re putting aside an appropriate amount each month.
Some sole traders balk at the added cost, but it’s much better to hire an accountant than to find yourself owing taxes you’re unable to pay.
If you’d like to know more about how to work out your tax without knowing your income, get in touch with us today.