James Trowell
Accounting Lead
Posted 1 week ago

Sole Trader Tax Rates For 2021/22

A new tax year brings a new set of tax rates to be aware of!

Below you’ll find a summary of the 2021/22 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 at the end of the tax year.

Personal Allowance

Everyone has a personal allowance that resets at the beginning of each tax year – this is the amount that you can earn tax-free. Remember that this changes based on your earnings (so you may need to check in on this a couple of times).

There has been an increase on the last tax year (up from £12,500). Below you can see how your income affects your personal allowance👇

Earnings Bracket

Personal Allowance

£0-£100,000

£12,570

£100,001 – £125,140

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

Over £125,140

£0

Income Tax Rates 2021/22

If you’re 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 (£12,570)

No income tax payable

Basic rate (£12,571- £50,270)

20%

Higher rate (£50,271 – £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 (£12,570)

No income tax payable

Starter rate (£12,571- £14,667)

19%

Basic rate (£14,668 and £25,296)

20%

Intermediate rate (£25,297 and £43,662)

21%

Higher rate (£43,663 and £150,000)

41%

Additional rate (Over £150,000)

46%

National Insurance Rates 2021/22

In addition to income tax, as a Sole Trader, you’ll also need to pay National Insurance to HMRC. The amount you need to pay is dependent on your profits. There are two forms of National Insurance; Class 2 and Class 4.

For the 2021/22 tax year the rates of National Insurance are as follows:

Class 2:

Profits (Per Year)

Class 2 Payable

Below £6,515

No Class 2 is payable

Above £6,515

£3.05 per week

Class 4:

Profits (Per Year)

Class 4 Payable

Below £9,568

No class 4 is payable

Between £9,568 – £50,270

9%

Over £50,270

2%

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 2020/21, 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 20/21 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 20/21 balancing payment: £5,000 – due 31st January 2022
  • 1st Payment on account for 2021/22: £2,500 – due 31st January 2022
  • 2nd Payment on account for 2021/22: £2,500 – due 31st July 2022

So that means rather than just paying the £5,000 you owe for 2020/21, you’ll be asked for an additional £2,500 as an advance on next years’ tax bill.

You won’t need to make these payments if:

  • Your last Self-Assessment tax bill was 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 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 on 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 Trader business for the 2021/22 tax year.

We’d always recommend speaking to an accountant if you feel unclear on any of this or have questions specific to your business.

If you already have one, you can securely share access to your bookkeeping data with them through the Coconut Accountant Portal.

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