Example Calculations

In the financial year ending 2022, your client Dennis earns £34,000 as a sole trader. The previous year, his business incurred a small loss of £2,000. He received £1,500 income from dividends in a limited company run by his brother in which he is a shareholder.

Dennis can set his previous years’ lost against his current income from the same trade. He is entitled to a personal allowance of 12,500. This means he has a total taxable income of £33,500 less £12,500 giving a taxable income of £21,000.

He is a basic rate taxpayer. He has NSNDI of £19,500 on which he will pay 20 percent tax. He has no savings income. His £1,500 pounds of dividend will be included in his dividend allowance of £2000 to every tax payer so will be tax free.

In the financial year ending 2022, You client Peter earns £130,000 income as a sole trader. He has no loses in the previous 4 years of trading. He paid interest payments totalling £1,200 on a loan which he used to buy into a partnership with his brother. He received interest payments of £12,000 from a high interest savings account.  He then received £8,000 in dividends from shares in his friends’ company.

Peter is not entitled to any personal allowance, given that he earns in excess of £125,000. He is entitled to deduct the £1,200 in interest payments he made in virtue of them being a qualifying loan. This is deducted from his NSNDI. He has taxable income of 148,800. He is, just about, a higher rate tax payer. He has NSNDI of £128,800. The first £37,000 of his NSNDI will be taxed at 20% with the balance at 40%.  He is entitled to £500 Personal Savings Allowance meaning that he will pay 40% on the balance of £11,500. He is entitled to £2,000 of dividend income tax free, meaning he will pay 33.75% on the balance of £6,000.

Tax on NSNDI @20% of £37,000= £7,400

Balance of NSDI is £91,800 which is taxed at 40% 36,720

Tax on savings at 40% £4,600

Tax on dividends 33.75 of £6,000= £2025

Total: £50,745

Sole Traders

Sole traders are obliged to register with HMRC within three months of starting their business. They are charged income tax on their trading profit from the date the business commences until the following 5 April. Subsequently, they will be assessed for income tax based on the trading profits in each 12 month accounting period.

In order to calculate income tax for a sole trader:

1)         Calculate the business’s chargeable receipts;

2)         Subtract the deductible expenditure and capital allowances.

3)         The resulting figure is a trading profit on which tax is paid.


The trading profit of a partnership consists of chargeable receipts minus deductible expenditure and capital allowances. This is then shared between the partners in accordance with their agreement, or the Partnership Act is no agreement exists. Each partner must include this profit on their tax return, which is assessed in the ordinary way.