How self-employment tax works (UK sole traders)

If you work for yourself as a sole trader, there's no employer taking tax off before you're paid — you work it out and pay it yourself once a year through Self Assessment. The bill has two parts: Income Tax and National Insurance, both charged on your profit. It's less complicated than it first looks. Here's how it works for the 2025/26 tax year.

What you're taxed on

You don't pay tax on everything your business takes in — you pay on your profit, which is your income minus your allowable business expenses. So the first job is to get the profit figure right; the tax is worked out on that. If your total self-employed income is under £1,000 you don't even need to declare it, thanks to the trading allowance.

Allowable expenses are costs incurred wholly and exclusively for the business — stock and materials, business travel, a share of your home and phone costs, accountancy and software, insurance, marketing, and equipment. Money you draw for yourself to live on is not an expense; it comes out of post-tax profit.

Income Tax on your profit (2025/26)

Your profit is taxed using the same Income Tax bands as an employee (England & Wales; Scotland has its own rates):

Personal allowance — 0%: the first £12,570 of profit is tax-free. It tapers away once profit passes £100,000 and disappears entirely at £125,140.

Basic rate — 20%: on profit from £12,571 to £50,270.

Higher rate — 40%: on profit from £50,271 to £125,140.

Additional rate — 45%: on profit above £125,140.

National Insurance for the self-employed

On top of Income Tax you pay National Insurance — but as a sole trader the rules are different from an employee's, and they changed recently in your favour:

Class 4 — the main charge: for 2025/26 it's 6% on profit between £12,570 and £50,270, then 2% on anything above £50,270. The main rate was cut from 9% to 6% in April 2024, so older guides will overstate it.

Class 2 — usually nothing now: if your profit is at or above the Small Profits Threshold of £6,725, you're treated as having paid Class 2 without actually paying anything — you keep your State Pension and benefit entitlement for free. Only if your profit is below £6,725 might you choose to pay Class 2 voluntarily (£3.50 a week) to protect that entitlement.

Rates and thresholds can change at each Budget — always confirm the current figures for the tax year you're filing.

Worked example

Say your business makes £50,000 profit after expenses, with no student loan. Your Income Tax is 0% on the first £12,570 and 20% on the remaining £37,430 — that's £7,486. Class 4 NI is 6% on that same £37,430 (the slice between £12,570 and £50,270) — £2,246. Class 2 is nil because you're above £6,725. So your total bill is about £9,732, an effective rate of 19.5%, leaving £40,268 in your pocket. The calculator applies each band for you so you don't have to.

Payments on Account — the cash-flow trap

Here's the part that catches people out in their first profitable year. If your Self Assessment bill is more than £1,000, HMRC asks you to pay towards next year's bill in advance, through Payments on Account. You make two instalments, each 50% of this year's bill, due 31 January and 31 July. That means your first January can demand roughly 150% of your actual bill in one go — so set the money aside early.

When you pay

Self Assessment runs by tax year (6 April to 5 April). The balancing payment for 2025/26 is due by 31 January 2027, with the first Payment on Account for the next year due the same day and the second on 31 July 2027. Register with HMRC for Self Assessment by 5 October following the tax year in which you started trading, and keep records of income and expenses as you go.

Common mistakes

Taxing turnover instead of profit. Capture every allowable expense before working out the tax — the bill is on what's left, not what came in.

Spending the tax money. The cash in your account isn't all yours. A rough rule of thumb is to set aside 20–30% of your profit for tax and NI as you earn it.

Being surprised by Payments on Account. Once your bill tops £1,000, budget for that extra half-year payment on top.

Using an old NI rate. Class 4 is 6% now, not the 9% you'll still see quoted in many places.

Confusing it with a limited company. Sole traders pay Income Tax and NI on profit; a limited company pays Corporation Tax instead, and you're then taxed separately on salary and dividends.

Rates confirmed against GOV.UK — Self-employed National Insurance rates and GOV.UK — Income Tax rates. Figures are for the 2025/26 tax year (England & Wales); always check the current figures for your situation.