Tax Rates for Sole Traders
James Trowell
Accounting Lead
Posted 2 months ago

Sole trader tax rates for 2020/21

A new tax year, a new set of tax rates to be aware of. Here’s a summary of the 2020/21 tax rates for sole traders. It’s worth familiarising yourself with them so there are no surprises when you come to complete your tax return.

Personal Allowance

Every individual has a personal allowance that resets each tax year. This is the amount in which you can earn income tax free. Last tax year this increased from £11,850 to £12,500, and it remains at this level for 2020/21. It’s important to note that it changes based on your earnings. Below you can see the impact of your income on your personal allowance.

Earnings Bracket

Personal Allowance

£0-£100,000

£12,500

£100,001 – £125,000

Your personal allowance will decrease by £1
for every £2 of income over £100,000

Over £125,000

£0

Income Tax Rates 20/21

For the 20/21 tax year, if you are based in England, Wales or Northern Ireland, all income that you earn over and above your personal allowance will be taxed as follows:

Tax Bands

Rate

Earnings below personal allowance (£12,500)

No income tax payable.

Basic rate (£12,501- £50,000)

20%

Higher rate (£50,001- £150,000)

40%

Additional rate (Over £150,000)

45%

If you live in Scotland different income tax rates apply, these are shown below:

Tax Bands

Rate

Earnings below personal allowance (£12,500)

No income tax payable

Starter rate (£12,501- £14,585)

19%

Basic rate (£14,586 and £25,158)

20%

Intermediate rate (£25,159 and £43,430)

21%

Higher rate (£43,431 and £150,000)

41%

Additional rate (Over £150,000)

46%

National Insurance Rates 20/21

In addition to income tax, as a sole trader you will also need to pay National Insurance to HMRC. The amount you need to pay is dependant on your profits. This is in two forms of National Insurance; Class 2 and Class 4 NICs. For the 20/21 tax year the rates of National Insurance are as follows:

Class 2 NIC

Profits (Per Year)

Class 2 Payable

Below £6,475

No Class 2 is payable

Above £6,475

£3.05 per week

Class 4 NIC

Profits (Per Year)

Class 4 Payable

Under 9,500

No class 4 is payable

Between £9,501 – £50,000

9%

Over £50,000

9% on everything earned between
£9,500 and £50,000, 2% on everything above £50,000

Payments on account

One point worth noting is that you may need to make advance payments towards your tax bill when it comes to your Self Assessment for 2019/20, these are known as ‘payments on account’ and are made twice a year – 31st January and 31st July.

Each payment is half of your liability from last year’s tax bill. If this is your first year as a sole trader it is unlikely you will have made payments on account before. So for those of you completing your tax return for the first time this year, it would look a little like this:

Imagine you’re preparing your Self Assessment tax return for the 19/20 tax year. You’ve worked as a sole trader for the full tax year and have no other sources of income. After all calculations are considered your tax bill comes to £5,000.

Your payments to HMRC will then be broken out as follows:

  • Self Assessment 19/20 balancing payment: £5,000 Due – 31st January 2021
  • 1st Payment on account for 2020/21: £2,500 – Due 31st January 2021
  • 2nd Payment on account for 2020/21: £2,500 – Due 31st July 2021

So that means rather than just paying the £5,000 you owe for 2019/20, you’ll be asked for an additional £2,500 as an advance on next years’ tax bill.

You will not need to make these payments if:

  • Your last Self Assessment tax bill is below £1,000
  • You’ve paid more than 80% of the tax you owe, for example through your tax code

VAT

Once the annual revenue of your company reaches £85,000 within a one year period you will need to register for Value Added Tax (VAT), a tax paid on most goods and services.

Once you’ve registered you will need to start charging VAT on your sales, but you can also can reclaim VAT on purchases.

This needs a bit of thought because you have to decide whether to increase your price to charge the VAT onto your customers, or keep the prices the same and pay the VAT yourself – reducing your profits. If your customers are businesses and mainly VAT registered it’s easier to charge VAT on because they are likely to be able to claim it back. However, if your customers are not businesses and aren’t VAT registered, the increase in price could have a negative impact your sales.

Managing VAT is where it can start to get slightly complicated as there are a few different rates and VAT schemes to be aware of. It requires careful record-keeping of all transactions and the rate of VAT they were charged at.

Starting with the standard VAT rates, outlined below.

VAT Type

Rate

Standard – applicable to most goods and services

20%

Reduced rate – a lower rate applicable to certain goods and services

5%

Zero rate – applied to specific goods and services such as food, books, newspapers, children’s clothes

0%


And there you have it, the tax rates that relate to your sole trade business for the 2020/21 tax year. It’s always useful to speak to an accountant if you feel unclear on any of this, and to ensure you have planned accordingly for taxation in 2020.

If you already have one, you can share access to your Coconut account with them through the Coconut Accountant Portal. But if don’t yet have one, you can speak with one through our Integrated Accounting Partners. Book a call with our team today at a time that suits you.

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