Tax brackets and responsibilities can be difficult for anyone in the working world to wrap their heads around. But new research suggests even bosses are struggling to make sense of it.
Somewhat alarmingly, digital payments provider, takepayments has discovered that 31% of sole traders don’t know what tax band their business is in.
With a new financial year starting this Sunday, being unaware of tax obligations can lead to costly penalties. We’ll go through the key tax responsibilities for the self-employed, below.
Understanding tax bands
The tax band you’re liable for ultimately depends on your business structure. Here’s a breakdown of the different tax obligations and what they mean for sole traders:
Income Tax
A tax that sole traders pay on earnings. The amount you pay depends on your income and tax band. The current rates in England, Wales and Northern Ireland are:
| Band | Taxable income | Tax rate |
|---|---|---|
| Personal Allowance | Up to £12,570 | 0% |
| Basic rate | £12,571 to £50,270 | 20% |
| Higher rate | £50,271 to £125,140 | 40% |
| Additional rate | Over £125,140 | 45% |
National Insurance
Self-employed workers pay National Insurance Contributions (NICs), depending on profits. You’ll have to pay Class 4 NI if you earn over £12,570 a year. The current rates for NICs are:
- 6% on profits of £12,570 up to £50,270
- 2% on profits over £50,270
You can also make Class 2 NI contributions (£2.50 per week for 2025/26) if your profits are less than the Small Profits Threshold of £6,725. However, as of April 2024, these payments are now treated as voluntary for the self-employed.
Value-added tax (VAT)
Both sole traders and limited companies have 30 days to register for value-added tax (VAT) if their turnover reaches more than £90,000 annually. Once registered, you’ll have to charge VAT on your goods and services and submit VAT returns to HMRC.
Business rates
Any small business with a physical establishment will be liable for business rates, which is a tax on commercial properties, such as offices, shops and warehouses.
Business rates are calculated based on the rateable value of a property and are typically paid to the local council. However, some traders may be eligible for Small Business Rates Relief (SBRR) to reduce their costs.
How to make 2025 less taxing
While the rise in Class 1A employer NICs is unlikely to affect the self-employed, small businesses and sole traders who are planning to take on employees this year need to be aware of the changes to avoid any unexpected liabilities. Here’s what you need to know:
1. Tax deductions
HMRC offers several tax deductions that employers qualify for to offset some of these costs. For example, the Employment Allowance scheme allows businesses to reduce their NICs by up to £5,000 per year, helping to lower their overall tax burden if they have employees.
Other common tax deductions include:
- Business rates relief
- Charge, reclaim and record VAT
- Claim capital allowances
- Self-employed expenses
2. Accurate record-keeping and timely tax submissions
Accurate record-keeping is essential to avoiding any tax-related headaches. Using good accounting software, such as HMRC-approved tools like QuickBooks, Xero, and Zoho Books, can help make the process easier by automatically tracking expenses, generating reports and helping you meet deadlines, such as for Self-Assessment, on time.
3. Seeking professional advice
Sometimes, the best way to stay on top of your taxes is to consult with a tax advisor or accountant. That way, you can get expert guidance tailored to your business, helping you take advantage of available deductions and ensuring you’re meeting all your obligations.
Whether it’s understanding complex tax laws, planning for the future or getting help with filing, professional advice can save you time, stress and potentially money in the long run.
takepayments has developed a Business Tax and National Insurance Calculator on their site, which helps sole traders estimate what their monthly and annual tax payments will be, based on their income and expenditure.
Tax blindness and its impact on SMEs
takepayments’ study, which surveyed over 400 sole traders and freelancers, also found that nearly half (43%) aren’t aware of the tax rate for their band. Moreover, 34% don’t know the deadline for making any advanced payments towards their bill.
“It’s not surprising that many small business owners are unsure of the legal obligations they have regarding things like tax and VAT,” comments Jodie Wilkinson, Head of Strategic Partnerships at takepayments. “The rules can be quite difficult to understand, especially if you just want to focus on growing your business.”
While sorting taxes can be a tedious task, accurate tax knowledge is essential for SME financial management, cash flow management and investment decisions.
Failing to meet tax obligations can also lead to serious consequences, including penalties for missed payments and even more severe legal actions or fines. HMRC can also impose fines for late filing or payment, with penalties ranging from £100 to higher percentages of the tax owed, depending on the length of the delay.
As the new financial year begins, now is the time for SMEs to take control of their tax obligations. Start by familiarising yourself with your tax band, taking note of key deadlines and ensuring your record-keeping is in order.
Consider using good accounting software to streamline the process and reduce the risk of errors, and don’t hesitate to seek professional advice if you’re unsure.