Understanding tax and National Insurance contributions as a sole trader

Understanding tax and National Insurance contributions as a sole trader

Many business start-ups will be registered as sole traders, certainly during their initial phase of growth.

This is understandable as being a sole trader is simpler in many aspects than setting up as a limited company. Accounting and paperwork are generally less time-consuming for example and you do not have to be VAT registered until your business exceeds a set turnover per year as determined by HMRC.

One thing that you still need to do though is complete a self-assessment tax return each year. This sets out how much you have earnt and also what business expenses you have incurred. By looking at this, HMRC will then send you a bill for the total amount of tax and NI you need to pay. It is always worth understanding a bit more about this though so you can plan properly and have an idea of what to expect.

Income tax payment as a sole trader

The first thing to know for any UK business start-ups registered as sole traders is that you get a personal tax allowance from the government. This is the amount you can earn without paying any tax on it – for the 2019/20 tax year, this is £12,500, but it will likely change in the future. The rate at which you pay tax on any money earnt if applicable will usually be at the basic rate for most start-ups. This is currently set at 20% for earnings up to £50,000 in the 2019/20 tax year. If you have a business that generates higher levels of income, you would be charged at a higher rate which could be 40% or 45%.

NI contributions as a sole trader

When you get your tax bill from HMRC, you will also see National Insurance contributions on there. Although there are a few different kinds you could pay, for many smaller businesses, Class 2 and Class 4 are the most common. Class 2 contributions are paid according to a set rate per week which is £3 for 2019/20. Class 4 are only paid once you go over a set threshold – this is £8,632 for 2019/20, and you would pay Class 4 NI at a rate of 9% on any money made over this figure. As noted above, there are other NI contributions you may incur but these are the main two to understand.

Let SQK Accountancy make it easier

As the above shows, understanding tax and NI responsibilities as a sole trader can be complex. When you also add in the regular changes HMRC make to thresholds and rules, then it can get time-consuming and tricky. If you would rather let the experts handle it, get in touch or give SQK Accountancy a call today on 0161 706 0444.

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