Becoming self-employed as a sole trader in the UK comes with lots of responsibilities, including the obligation to pay taxes.
Being a sole trader can offer you numerous benefits, such as increased income and flexibility, and an increasing number of individuals in the UK are pursuing this path. As for this article, it covers the basics of sole trader tax rates in the uk. Let’s start!
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What is sole trader tax?
Did you know that in October 2022 more than 4 million people in the UK were self-employed? The sole trader tax is the tax that self-employed individuals, who operate their businesses as sole traders, are required to pay on their business profits. Usually, sole traders are responsible for paying income tax on the profits they make. In addition, you must also pay Class 2 and Class 4 national insurance contributions.
As the Hoxton Mix explains, it’s necessary to be aware about your responsibilities regarding sole trader taxes to avoid penalties and ensure compliance with UK tax laws. AS for the basic tax rate for sole traders in the UK, it is 20%, which is applicable to taxable income up to £37,700. For taxable income between £37,701 and £150,000, the higher tax rate of 40% applies. Any income over £150,000 is taxed at the additional rate of 45%. And also the amount of NICs you pay will depend on your profits, with a basic rate of 9% on profits between £6,515 and £50,270, and a higher rate of 2% on profits over £50,270.
What are the steps to establish oneself as a sole trader in the UK?
Keeping track of your finances will help you always be able to work with your financial obligations.
To set up as a sole trader in the UK, feel free to follow the next crucial steps:
- Pick up a business name. Ensure that it is distinctive and does not violate any existing trademarks.
- Register for self-assessment with HM Revenue & Customs (HMRC). Register for self-assessment with HMRC as soon as you start working for yourself.
- Register for National Insurance. As well, go through registration for National Insurance contributions.
- Create a business bank account. You’ll need it for your business transactions.
- Keep records. Be sure to keep precise records of all your business income and expenses, so it’s a good idea to set up a system for this from the start.
- Register for VAT. If your annual turnover is above a certain threshold, you’ll need to register for VAT.
What are the main tips for sole traders?
For sole traders, several tax tips can help avoid common pitfalls. Here are some of them:
- Ensure you budget for and make any payments on account.
- Be attentive while calculating the right amount of business expenses.
- Keep a clear track of any income and expenses related solely to your business by having a separate business bank account.
- Seek expert advice well in advance of filing your self-assessment return to correctly calculate your tax bill, taking into account only deductible expenses.
- Plan for any unexpected payments.
What are sole trader tax payment deadlines?
Your tax bill as a sole trader for a specific tax year, including any balancing payment, must be paid by 31st January of the following year. This means that for the 2021-2022 tax year, you have until 31st January 2023 to make the payment. However, the payment must be received in full by HMRC before midnight on that date.
If you’re required to make a payment on account to cover your estimated tax for the upcoming year, it will be payable in two installments. The first installment will be due on the same deadline as your tax bill for the previous year, i.e., by midnight on 31st January 2023.
What are the tax differences between a sole trader and a company in the UK?
In the British tax system, there are several differences between sole traders and companies.
Here are some of the key differences:
- Income tax. The current corporation tax rate in the UK is 19%, and it applies to all taxable profits earned by limited companies.
- National Insurance Contributions (NICs). As a sole trader, you are required to pay Class 2 and Class 4 NICs on your business profits, while a company does not need to pay NICs. Class 2 NICs are a fixed weekly rate, while Class 4 NICs are based on your business profits.
- VAT. If your business is registered for VAT, there are also differences in how a sole trader and a company handle VAT. A sole trader may choose to register for VAT voluntarily, while a company must register for VAT if its annual taxable turnover exceeds the VAT registration threshold, which is currently £85,000.
- Capital Gains Tax (CGT). If you sell or dispose of a business asset for more than its cost, you may be subject to CGT. As a sole trader, you may be liable for CGT on the disposal of any business assets, while a company is liable for corporation tax on any gains made from the disposal of assets.
- Tax planning. A company may have more opportunities for tax planning than a sole trader, as it can choose when to pay dividends and can take advantage of various allowances and reliefs, such as the Annual Investment Allowance and R&D Tax Credits.
Experts, like the Hoxton Mix, highlight that understanding the sole trader tax rates in the UK is essential for self-employed individuals to fulfill their tax responsibilities. Registering for self-assessment and National Insurance, setting up a separate bank account, keeping accurate records, and seeking expert advice are all crucial steps to take as a sole trader.
Additionally, being aware of budgeting for payments on account, calculating expenses correctly, and planning for unexpected payments are essential tax tips. By following these guidelines, sole traders can operate their businesses smoothly and meet their tax obligations. Thank you for your time and attention!