Personal Allowances for Sole Traders
If you’re a sole trader in the UK, understanding your personal allowance is key to calculating your taxable profit and managing your tax efficiently. This guide explains what a personal allowance is and how it applies to sole traders.
What is a Personal Allowance?
A personal allowance is the amount of income you can earn each tax year before paying income tax.
- For the current tax year, the standard personal allowance is £12,570.
- This allowance applies to sole traders as well as employees.
- If your income exceeds certain thresholds, the allowance gradually reduces.
How Personal Allowance Works for Sole Traders
As a sole trader, you pay income tax on your business profits after deducting allowable expenses. For Income tax bands and rates please refer to 2 links at the bottom of this page.
National Insurance Contributions (NICs) for Sole Traders
- Class 2 and 4 NICs: More info: GOV.UK Class 2 and 4 NICs
- If your profits are £6,845 or more a year; Class 2 contributions are treated as having been paid to protect your National Insurance record. This means you do not have to pay Class 2 contributions.
- If your profits are more than £12,570 a year, you must pay Class 4 contributions.
- For tax year 25/26 percentages are 6% on profits over £12,570 up to £50,270 and 2% once you go over the £50,270 threshold.
- The Class 2 rate for tax year 25/26 is £3.50 a week. When your profits are less than £6,845 a year you do not have to pay anything; however you may choose to pay voluntary Class 2 contributions.
How to Pay (NICs) for Sole Traders
- You can pay Class 2 and Class 4 using Self Assesment system. HM Revenue and Customs uses this system to collect Income Tax.
Key Points
- Personal allowance reduces your taxable profit, not your total revenue.
- You may still need to register for self-assessment even if profits are below the allowance.
- Personal allowance is shared across all income sources, including employment, rental income, or dividends.