Taxation of sole traders, partnerships and LLPs
Sole Traders, Partners and members of Limited Liability Partnerships are classified as self‑employed and must complete a self assessment tax return annually. You will not be taxed on your income as employees are, you will instead be allowed to deduct business expenses and be taxed on the profit you have made.
Taxable profits are calculated as:
Your trading proﬁts, including any adjustments for capital allowances and balancing charges, plus any New Deal Allowance that you receive From this you can take away:
- Interest and annual payments, if they are only to do with your business and have not already been deducted in working out the trading proﬁts for tax purposes
- Business or “trading” losses, which can be set against proﬁts.
The following must not be deducted:
- Personal tax allowances
- Retirement annuity relief, personal pensions relief and pension contributions
Sole Traders, Partners and members of Limited Liability Partnerships are classiﬁed as self-employed and pay income tax and National Insurance contributions on their respective shares of the proﬁts and gains of the business. The tax rates for individuals are:
- 20% on taxable income up to £35,000
- 40% on taxable income £35001 - £150,000
- 50% on taxable income in excess of £150,000
Employee's National Insurance Contributions (Class 2 and 4)
Class 2, paid at a weekly flat rate, count towards Incapacity Benefit, state retirement pension and Bereavement Benefit
Class 4, Paid on profits and gains at or above a set level, are based upon your taxable profits for that year, which you will show on your annual Self Assessment tax return.
This applies to all people who are normally self-employed, and aged 16 or over, and under state retirement age. Class 4 liability does not cease until 5 April following retirement age.