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More than fifty per cent of self-employed individuals register as sole traders in the UK, and the number keeps increasing. But does a sole trader pay corporation tax or income tax? This guide clarifies the confusion and equips you with the knowledge to navigate your tax obligations as a sole trader.
Does a Sole Trader Pay Corporation Tax?
No, a sole trader does not pay corporation tax. HMRC taxes sole traders as individuals, liable to individual income tax via self-assessment and National Insurance contributions.
Corporation tax is exclusively for limited companies and other corporate entities.
A sole proprietorship, however, may not be tax efficient compared to a limited company. A limited company director must pay the primary rate of 19% for their corporation tax, whilst a sole trader pays two or more types of taxes with differing rates. The higher the annual profit, the higher the tax amount will be.
What Taxes Do Sole Traders Pay?
To ensure compliance and effective revenue management, below is a breakdown of what tax do sole traders pay UK:
- Income Tax: You pay income tax on profits exceeding the personal allowance.
- National Insurance (NI) Contributions: You become liable to a fixed amount of Class 2 liability when your annual revenue exceeds the small profit threshold. Class 4 liability is a percentage of your profits over the lower limit. The greater your revenue, the higher the rate you pay.
- Value Added Tax (VAT): Registration is optional when the taxable turnover is less than the threshold; however, VAT becomes mandatory when turnover exceeds the threshold.
- Capital Gains Tax (CGT): Applies to profits earned by selling business assets. You can use many strategies to save on your capital gains tax.
Allowable Expenses to Claim
To reduce taxable profit from earnings, you can claim allowable expenses. For expenses to qualify, they should be wholly and exclusively used to keep the business running. Personal expenses are non-claimable.
Some claimable tax relief for sole traders are:
- Travel costs like vehicle insurance, fuel, travel fares, etc.
- Office-related expenses such as phone bills, stationery, paid software, printing, etc.
- Clothing expenses like protective gear or uniforms.
- Salaries and subcontractor overheads such as bonuses, pensions, and freelance worker payments.
- Financial funds cover business loans, insurance, interest on business insurance and loans, and accountancy charges.
- Training and development reserves comprise refresher courses relevant to business skills.
- Advertising and marketing budgets, including paid ads, promotional materials, website development, business cards, etc.
- Stock and raw material costs, including goods purchased to sell or raw materials procured for production.
A few important considerations to note are:
- If you use items for personal and business purposes, you can only claim the portion used in industry.
- Freelancers working from home can claim a proportion of utility bills such as internet, electricity, and rent.
- Sole traders can also calculate expenditures using simplified expenses, a flat rate for home-based freelancers, living on business premises, and business costs for some vehicles.
Current Tax Rate [2024/25]
Tax brackets for sole traders for the 2024/25 tax year are as follows:
| Band | Taxable Income | Tax Rate |
|---|---|---|
|
Personal Allowance |
Up to £12,570 |
0% |
|
Basic Rate |
£12,571 to £50,270 |
20% |
|
Higher Rate |
£50,271 to £125,140 |
40% |
|
Additional Rate |
Over £125,140 |
45% |
For individuals based in Scotland, income tax rates and bands are different.
Self-Assessment Registration
The tax year 2024/25 runs from 6 April 2024 to 5 April 2025, and you must submit your tax returns by 31 January 2026.
Sole traders do not have to register their businesses as a legal entity to HMRC; as self-employed, they must set up as a sole proprietor to obtain their unique tax reference number and submit self assessment tax returns every 31 January.
When Does a Sole Trader Pay Tax?
Whilst sole traders don’t have to register their businesses as a legal entity to HMRC, as self-employed, they are required to set up as a sole proprietor to obtain their unique tax reference number.
Sole traders will have to pay income tax, NICs, and VAT (if applicable) every tax year of their business and are required to complete self assessment tax return every 31st January.
Upon submitting self assessment return, HMRC will then notify them of the exact amount and date they are going to pay their tax bills. Depending on the taxable income that they declared, they will set the deadline of their payment either by 31st January and also by the end of July if balancing payment on bank account is required.
Self-Assessment Registration
Register with HMRC via the self-assessment portal by 5 October as soon as the tax year you became a sole proprietor ends. Once registered, you can estimate your tax relief claims on your profits through the sole trader tax UK calculator.
Filing Tax Returns
During the current tax year from 6 April 2024 to 5 April 2025, sole traders must submit business tax returns to HMRC by the following deadlines:
- Paper return: 31 October after the end of the tax year.
- Online return: 31 January after the end of the tax year
Tax Payments
To stay compliant with HMRC, you must make tax payments in line with the following deadlines:
- 31 January: Deadline to clear all tax dues owed for the preceding tax year.
- 31 July: A second payment deadline to make advance payments known as payments on account.
FAQs on Sole Trader Tax
Do sole traders need to register for PAYE?
Yes, if a sole trader has an employee(s). If not, then no need to register for PAYE.
What happens if a sole trader misses the tax deadline?
They immediately incur a £100 penalty and interest with further delays.
What are payments on account?
If the current tax bill exceeds £1000, HMRC stipulates advance payments in two instalments based on previous tax bills.
How does a sole trader claim back VAT?
Sole proprietors can claim the VAT back by registering and submitting VAT returns with HMRC, then reclaiming VAT on overhead costs through VAT returns.
What is the difference between a sole trader and a limited company?
A sole trader is personally accountable for business debts, whereas a limited company is a legal entity on its own, even still liable to corporation tax on losses.
Get Expert Tax Advice
Does a sole trader pay corporation tax? As discussed above, you pay income tax as a sole trader, not corporation tax. If you need personalised guidance on your sole trader taxes, Legend Financial is here to help, from tax-efficiency planning to filing yourself assessments. Reach us today!
