Tax Tips for Sole Traders & Partnerships

When you’re an unincorporated business, it’s important to be in control of your tax planning. We’ll help you tick the compliance boxes and manage your position in a tax-efficient way.

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You don’t have to be a limited company to trade as a business. It’s possible that you’re operating already as an ‘unincorporated entity’ (usually as a sole trader, or a partnership). And the way that limited companies and unincorporated entities are taxed is very different.

Here's how tax works for unincorporated businesses and the things you need to consider when it comes to your tax planning.

A different way of paying your business taxes

If you operate your business through a limited company, the company itself will pay corporation tax on its profits – and, as a director, you’ll generally be paid through a mixture of salary and dividends.

If you operate an unincorporated business, e.g. as a sole trader, you won’t pay corporation tax, but you will pay personal tax and National Insurance on any business profits you’ve made.

• In most cases, the taxable profits are calculated in a similar way whether you’re trading through a limited company or as a sole trader. As a sole trader you can’t claim wages for yourself as a business expense, although you can employ other people.

• The next main difference is the use of a private vehicle for business. Because there’s no legal difference between you as an individual and your sole trader business, your vehicle doesn’t count as a company car.

• You can recover the business use of your personal vehicle by charging the HMRC-approved mileage rate (£0.45/mile for the first 10,000 miles in the tax year, £0.25/mile thereafter). Or you can claim the business proportion of your vehicle costs (fuel, servicing, repairs, insurance, vehicle tax etc) together with the appropriate proportion of capital allowances to cover the initial purchase price.

• Again, because there’s no legal difference between the individual and the business, pension contributions will be ‘personal’ rather than ‘company’ contributions. Although there is tax relief available, the contributions don’t come off the business profits and the tax benefits aren’t as attractive as they can be for company directors.

• Capital allowances are claimed in a similar way to the limited company calculations, although the super-deduction capital allowance is only available to limited companies.

• There are some differences in the way that ‘home office’ type costs are calculated, but these aren’t likely to be significant.

Paying your income tax on business profits

When your business taxable profits are calculated, they’ll be subject to income tax. Your annual tax-free personal allowance (currently £12,570) is deducted, and the rest taxed at the basic, higher and additional rates as appropriate. Tax relief on things like your personal pension contributions and gift-aided charitable donations may be available to reduce your overall tax bill.

Other things to note include:

• You’ll generally pay two types of National Insurance contributions (NICs) – a flat rate Class 2 contribution of £158.60 for 2021/22 plus Class 4 contributions at a rate of 9% for annual profit between £9,568 and £50,270. Then a higher rate of 2% that will be charged on profits above that level.

• Remember that all sources of personal income are brought together on your personal tax return, and an overall tax liability calculated. This can include, for example, profit from self-employment, rental income for any residential and furnished holiday lets you may have, paid employment that has been subject to PAYE and other sources such as dividend and interest income.

Talk to us about your tax planning

If you’re an unincorporated business and need to get your tax planning under control, please do come and talk to us. We can help you get your compliance in order, complete your self-assessment income tax return and apply for any tax reliefs that are available.

Get in touch to talk about your tax position.

P.S don't forget the deadline for filing your self assessment is the 31st January! We can save you time by doing this for you.