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, how it applies to sole traders, and practical examples for the 2025/26 tax year.
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.
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.
Useful Links from HMRC
Need help understanding your personal allowance or filing your tax return? Contact me today for support.