The UK tax system can be complex, but the benefits of having a business there for solopreneurs can be substantial.
The UK offers a very competitive tax environment, making it an attractive destination for many business owners.
To take full advantage, however, you need to understand the key taxes that might affect you:
- Corporation Tax
- Value Added Tax (VAT)
- Income Tax
- National Insurance contributions (NICs)
However, there are many others, and you should always speak to an international tax adviser for more information.
Corporation Tax: Low rates for businesses
Corporation Tax in the UK is relatively low compared to other countries, standing at 19 to 25 per cent for the financial year 2023/24.
This tax applies to the profits of your UK-based company.
As a solopreneur, you can maximise your post-tax income by taking advantage of various reliefs and allowances, such as the Annual Investment Allowance which gives you a £1 million tax free allowance for investments in things like machinery or other assets.
You can also apply for Research and Development (R&D) tax credits if you intend to make groundbreaking advancements in your field of business.
Value Added Tax (VAT)
If your business turnover exceeds £90,000 in a 12-month period, you must register for VAT.
The standard VAT rate is 20 per cent, but there are reduced rates and exemptions depending on the nature of your goods or services.
For solopreneurs trading internationally, understanding VAT on exports and imports is crucial as failing to comply with the rules can result in penalties and fines.
The UK has specific rules that can benefit international traders, such as zero-rating VAT on exports outside the UK but you should discuss this with a tax adviser.
Income Tax: Personal taxation on your earnings
As a solopreneur, your personal income will also be subject to UK Income Tax.
The rates are progressive, starting at 20 per cent for income up to £37,700, 40 per cent for income between £37,701 and £150,000, and 45 per cent for income above £150,000.
Bear in mind that these tax rates only apply to the income above the rates so, if you earn £100,000 here’s how you’ll be taxed:
- Zero per cent on income up to £12,570 (your annual income allowance).
- 20 per cent on the next £25,131 (taking you up to £37,701)
- 40 per cent on the next £74,869 (taking you up to £100,000)
Utilising personal allowances and tax-efficient remuneration strategies, such as salary and dividends, can help minimise your tax liability.
National Insurance contributions (NICs)
National Insurance Contributions are mandatory if you earn above a certain threshold – these are used to fund healthcare and other national projects in the UK.
For solopreneurs, NICs apply to both your employment income (if you receive it) and profits from self-employment.
The rates vary, with Class 2 and Class 4 NICs relevant for self-employed individuals:
Self-employed individuals with profits over £6,725 per year must pay Class 2 NICs.
- Class 2: These contributions are a flat rate of £3.45 per week for the 2024/25 tax year.
- Class 4: These are calculated as a percentage of your annual profits. For the 2024/25 tax year, the rates are eight per cent on profits between £12,570 and £50,270, and two per cent on profits above £50,270.
Proper tax planning can help manage these contributions effectively – again, speak to your tax adviser for help.
Inheritance Tax: Protecting your legacy
While not immediately relevant to day-to-day operations, understanding Inheritance Tax (IHT) is crucial for long-term planning.
IHT is charged at 40 per cent on estates above the nil-rate band of £325,000.
Business Property Relief can provide significant IHT relief for business assets, potentially reducing the taxable value by up to 100 per cent.
Making the most of tax incentives and reliefs
The UK Government offers several incentives and reliefs to encourage business growth and innovation.
These include the Patent Box regime, which applies a 10 per cent Corporation Tax rate to profits from patented inventions, and R&D tax credits, which provide additional relief for qualifying research and development expenditure.
As an international solopreneur, accessing these incentives can significantly enhance your business profitability.
As you’ll no doubt be aware, compliance is key to avoiding penalties and ensuring smooth operations.
Keeping accurate records, filing timely tax returns, and staying informed about changes in tax legislation are essential practices.
HM Revenue & Customs (HMRC) provides various resources and guidance to help solopreneurs meet their tax obligations, but we strongly encourage you to speak with a tax adviser for tailored guidance.
