Tax planning for unincorporated businesses (sole traders and partnerships) 

Unincorporated businesses like sole traders and partnerships, are subject to different taxes than limited companies.

Specifically, and most importantly, sole traders and partnerships must pay Income Tax on profits, with rates ranging from 20 to 45 per cent depending on your income level.

• Personal Allowance (up to £12,570) = zero per cent
• Basic rate (£12,571 to £50,270) = 20 per cent
• Higher rate (£50,271 to £125,140) = 40 per cent
• Additional rate(over £125,140) = 45 per cent

You must also pay Class 2 and Class 4 National Insurance Contributions, based on profits.

For the tax year 2023/24, Class 2 NICs are £3.45 per week for self-employed individuals with profits of £12,570 or more per year.

(In the Autumn Statement 2023, the Government announced that Class 2 contributions will be abolished from 6 April 2024).

Class 4 NICs are charged at nine per cent on profits between £12,570 and £50,270, and two per cent on profits over £50,270.

If turnover exceeds £90,000, you must also register for, and charge, VAT. (This threshold was increased in the 2024 Spring Budget from £85,000).

Ways to mitigate your taxes

As a sole trader or partnership, you have fewer ways to reduce your taxes than limited companies.

(More on changing business structure in the next section).

However, there are a few mitigation strategies open to you.

• Utilise the trading allowance: The first £1,000 of income from self-employment or casual services is tax-free, known as the trading allowance. This can be useful for very small businesses or those with minimal expenses.
• Capital Allowances: Capital allowances enable you to write off the cost of tangible capital assets against taxable income, effectively reducing the amount of your profit that is subject to tax. The rates and types of allowable assets vary, including main rate items like environmentally friendly machinery and equipment. Most businesses, regardless of size, can claim capital allowances.
• Annual Investment Allowance (AIA): The AIA permits businesses to deduct the full cost of qualifying capital expenditures from their profits before tax, up to a limit of £1 million. This allowance covers most types of plant and machinery, excluding cars, and is available to sole traders, partnerships, and limited companies. The AIA is particularly advantageous for businesses making significant investments in assets, as it can lead to substantial immediate tax relief.
• VAT schemes: If applicable, consider registering for VAT and choosing the most beneficial VAT scheme for your business, such as the Flat Rate Scheme, which can simplify VAT reporting and potentially reduce VAT liabilities. This scheme applies to businesses with a turnover up to £150,000 and means you pay a flat rate but receive the difference back if you overpay.

To fully understand these strategies, and for tailored guidance on applying for them, you should always consult with an accountant.

Remember, mistakes on your tax returns – accidental or otherwise – including on reliefs and allowances, are frowned upon by HM Revenue & Customs (HMRC).

Time for a different business structure?

The choice of business structure – sole trader, partnership, or limited company – can have significant tax implications for your business.

Limited companies often enjoy lower tax rates compared to individual taxation rates but come with additional compliance requirements.

The decision should be based on a detailed analysis of your business’s specific circumstances.

The Government offers advice on choosing a business structure but as always it is important to consult with your accountant who can tell you about the specific benefits of each choice.

We can walk you through business restructuring and tell you which option is best for your specific circumstances.

Please don’t hesitate to get in touch if you require advice on your taxes.