Sole Trader Tax Rates 21/22 Explained
If you’re going self-employed in 2021/2022 you will need to consider the taxes that are payable for that tax year.
Here we summarise the key tax rates that affect you for the 2021/2022 tax year.
Personal Allowance
Every individual has a personal allowance that resets at the beginning of each tax year - this is the amount that you can earn tax-free.
This tax year if you earn below £100,000 your tax-free personal allowance will be £12,570.
If you earn over £100,000 then you begin to lose your personal allowance. Your personal allowance will decrease by £1 for every £2 of income over £100,000. If you earn over £125,140 then you will fully lose your allowance.
Income Tax Rates
Income tax is paid depending on the level of income in a given tax year (6th April- 5th April). Remember the first £12,570 is tax-free. Income tax is split into different tax bands, In England, Wales and NI they are split between 3 different tax bands:
Basic rate- If you earn between £12,571- £50,270 then the income tax you pay is 20%
Higher rate- If you earn between £50,271- £150,000 then the income tax you pay is 40%
Additional Rate- If you earn over £150,000 then the income tax you pay is 45%
National Insurance Rates 2021/22
As well as paying income tax, a sole trader will also have to pay National Insurance contributions. There are two types of National Insurance; Class 2 and Class 4.
Class 2 NIC:
So if your profits are below £6,515 then no Class 2 NI will be payable. If your profits exceed that then Class 2 NIC is payable at a rate of £3.05 per week (for every week you're self-employed).
Class 4 NIC:
Class 4 is calculated a little differently, you’ll pay 9% on profits between £9,569 - £50,270.
If you are earning over £50,270 then a further 2% on profits is due over this amount.
Payments on account
Payments on account are advance payments towards your tax bill 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 you’re in your 1st year of trading as a sole trader it’s unlikely that payments on account will be due.
You’ll also not have ‘payments on account’ based on the following:
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
Let’s run through an example to see how this works:
You’re a Sole Trader for the 20/21 tax year. You’ve worked the full tax year and this is your only income. Your tax bill comes to £2,000.
Your payments to HMRC, breakdown as follows:
Self-Assessment 20/21 balancing payment: £2,000 – due 31st January 2022
1st Payment on account for 2021/22: £1,000 – due 31st January 2022
2nd Payment on account for 2021/22: £1,000 – due 31st July 2022
So that means rather than just paying the £2,000 you owe for 2020/21, you’ll be asked for an additional £1,000 as an advance on next years’ tax bill.
If you have any questions or queries on sole trader taxes, feel free to call us on 01869 323887 or send us your enquiry here.
