Tax as a Sole Trader

When you’re running a business on your own, getting around the complexities of sole trader tax can be taxing, to say the least! Bigger companies can hire tax experts and entire in-house teams to navigate the British tax system, which has more legislation than any other country in the world.

Sole trader tax

  • A sole trader must pay tax on all their business profits, when expenses have been taken away 
  • Class 2 and Class 4 National Insurance and Income Tax must be paid on all taxable business profits
  • A sole trader should have a separate business account, so that they can claim tax relief on interest and charges
  • A sole trader can withdraw cash from their business without tax effect.
  • If a sole trader sells any assets then any monetary gain will be taxed.
  • Tax relief can be claimed by sole traders for any expenses that are exclusively business expenses.

If you are a sole trader you can register any time until October in your business’ second tax year.

Income tax for sole traders

Income Tax for sole traders is calculated based on self-employment income (minus disallowable expenses). Every UK resident is entitled to a personal tax-free allowance before their income is taxed, so you’ll need to deduct it from your overall income to determine what your taxable income is.

The current Income Tax rates for sole traders are:

  • Personal allowance: the first £11,850 = tax-free.
  • Basic rate tax: the next £34,500 = 20% tax
  • Higher rate tax: between £34,501 and £150,000 = 40% tax.
  • Additional rate tax: the next £150,000 = 45% tax.

When taxable income exceeds £100,000, the personal allowance rate reduces by £1 for every £2 of income above this level.

The deadline to file a tax return is 31st of January.

Sole Trader National Insurance Contributions (NIC)

Sole traders are currently required to pay two forms of National Insurance Contributions: Class 2 and Class 4. During your Self Assessment, for Class 4 you must calculate the amount you owe based on your profit, whereas for Class 2 you must pay an amount based on a fixed rate charge.

Class 4 NIC:

  • The first £8,424 = 0%.
  • The next £46,350 = 9%
  • Income above £46,350 = 2%.

Class 2 NIC:

  • A fixed rate charge of £2.95 per week.
  • When a business earns below £6,205 per annum, they can claim exemption due to being below the small income threshold.
  • Class 2 NIC is due to be scrapped in April 2019.

Help with understanding sole trader tax

THE HMRC Website has Sole Trader Tax Help Guidelines and offers plenty of free advice  in the form of video and webinars to help you out. Your local authority likely runs regular workshops and you can find other advice from different websites and forums such as Taxation Web.

Don’t leave it all until the last minute or ignore it. Tax mistakes can lead to major issues and you can be fined or even imprisoned.

Small Business Accounting Services

If you are struggling to get your head around any of the above and need an accountant to help, then give Barron & Co a call on 0121 426 4155 or complete the form on our website Our team are very experienced in tax preparation services and will be happy to help out.