Taxation of sole traders and partnerships 

Operating as a sole trader, partner or member of a limited liability partnership means you are classified as self-employed for taxation purposes. As a result, you must make National Insurance (NI) Contributions and pay Income Tax in respect of the profit the business makes.


NI contributions. There are two classes of NI Contributions applicable to self-employed people. Class 2 is paid at a single rate (£2.10 per week), and contributes to state retirement pension, bereavement benefit and incapacity benefit.

Whether or not you have to pay Class 4 depends on the level of your taxable profits for that year as set out on your Self Assessment form. Your contribution is calculated as a percentage of your profits. Different percentages will apply depending on whether your profit falls within certain limits. In 2006-7, the limits and percentages were as follows:

Upper limit - £33,540
Lower limit - £5,035
Rate for profits falling between these limits – 8%
Rate for profits falling above upper limits – 1%

Both Classes 2 and 4 must be paid by all people below the state retirement age who are normally self-employed and are aged 16 and above.

Calculating income tax. To be able to calculate your income tax, you must first know what income is. This is defined as your trading profits, including any adjustments for balancing charges or capital allowances.

Your tax liability can be reduced by subtracting annual payments or interest (if solely for business purposes). Profits can also be offset by business losses.
You cannot, however, subtract personal tax allowances, drawings, pension contributions, personal pensions relief or retirement annuity relief.

Professional help. Make sure you get help with your calculations and advise on latest ways to reduce your tax commitment from an accountancy firm, preferably one which specialises in working with contractors such as PlanIT.

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