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
  • Drawings

Tax transparent

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.

Useful Resources

Starting Out, Business Tax