Going self-employed means you become responsible for calculating and paying your own tax. Unlike employees, whose income tax and National Insurance are deducted automatically through PAYE, sole traders pay tax via Self Assessment · submitting a tax return each year and settling the bill themselves. Understanding how the system works helps you budget accurately and avoid nasty surprises.
The two most common structures for self-employment in the UK are sole trader and limited company (operating as a director-shareholder).
Sole trader · the simplest structure. You are your business. Your profits are your personal income and you pay income tax and NI on them through Self Assessment. There is no separation between you and the business for legal or tax purposes.
Limited company · a separate legal entity. You are an employee of the company (typically paid a salary up to the NI threshold) and take the rest as dividends, which attract a different and often lower tax rate. Running a limited company involves more administration (Companies House filings, annual accounts, corporation tax returns) but can be more tax-efficient at higher income levels.
This guide focuses on sole traders. As a rough guide, the tax advantages of a limited company tend to outweigh the extra administration cost when profits exceed around £30,000–£40,000, but this depends on your specific circumstances and personal tax position.
Self-employed people used to pay two types of NI: Class 2 (a flat weekly charge) and Class 4 (a percentage of profits). From April 2024, Class 2 NI was effectively abolished for most self-employed people. You no longer pay Class 2 NI, though your state pension entitlement is protected if your profits exceed the Small Profits Threshold (£12,570).
If your profits are below £12,570, you can pay voluntary Class 2 NI at £3.45 per week to protect your state pension record. Most sole traders with meaningful profits no longer need to worry about Class 2 at all.
Class 4 NI is the main NI charge for self-employed people. It is calculated on your taxable profits (income minus allowable expenses):
Note: the Class 4 main rate was reduced from 9% to 6% from April 2024. Self-employed people now pay less NI than employees on the same level of earnings.
Your taxable profit is added to any other income you have (e.g. employment income, rental income, savings interest) and taxed at the standard income tax rates:
As a sole trader, you cannot pay yourself a salary from your business to reduce your tax bill · all profits are treated as your personal income regardless of whether you actually draw them from the business.
You can deduct allowable business expenses from your income before calculating tax and NI. This is one of the most important ways to reduce your tax bill legally. Allowable expenses are costs that are incurred wholly and exclusively for the purpose of your trade. Common examples include:
Personal costs, entertaining clients, clothing (other than uniforms or protective gear), and anything with a private use element are not fully deductible.
As a self-employed sole trader you must register for Self Assessment with HMRC and file a tax return each year. Key dates to remember:
The tax year runs from 6 April to 5 April. Your 2025/26 return (covering income earned from 6 April 2025 to 5 April 2026) is due for filing by 31 January 2027.
HMRC uses a system called "payment on account" to collect tax in advance from self-employed people. If your Self Assessment tax bill exceeds £1,000, you must make two advance payments towards the following year's bill:
Each payment is 50% of your previous year's tax bill. This means that in your first year of filing, your January payment includes your full year's tax plus an advance payment for the following year · which can be a significant sum. Budgeting for this from the start is essential.
Enter your income and expenses to see your income tax, Class 4 NI and total tax bill for 2026/27.
Open Self-Employed Tax Calculator →| Gross Income | £45,000 |
| Allowable Expenses | £8,000 |
| Taxable Profit | £37,000 |
| Personal Allowance | £12,570 |
| Taxable Income (for IT) | £24,430 |
| Income Tax @ 20% | £4,886.00 |
| Class 4 NI @ 6% (on £37,000 - £12,570) | £1,465.80 |
| Total Tax & NI | £6,351.80 |
| Net Profit After Tax | £30,648.20 |
| Effective Tax Rate | 17.2% of gross income |
With £45,000 of income and £8,000 of allowable expenses, taxable profit is £37,000. Income tax of £4,886 is due on the portion above the personal allowance. Class 4 NI of £1,465.80 is due on profits above £12,570. The combined bill is £6,351.80, leaving net profit after tax of £30,648.20. Additionally, HMRC will require a payment on account of £3,175.90 (50% of the tax bill) towards the following year, due by 31 January and 31 July.
A common mistake for new sole traders is spending all their income without setting aside money for tax. A practical rule of thumb is to save 25-30% of every payment you receive into a separate account earmarked for tax. This covers income tax, Class 4 NI and payments on account.
A high-interest savings account or Cash ISA can make your tax savings work harder while you wait to pay the bill.
Use our free self-employed tax calculator to estimate your 2026/27 income tax and NI bill.
Open Calculator →You must register for VAT if your VAT-taxable turnover exceeds £90,000 in any rolling 12-month period (2026/27 threshold). You can also register voluntarily if your turnover is below this. Registration means you must charge VAT on your sales and submit quarterly VAT returns, but you can also reclaim VAT on business purchases.
Yes. Personal pension contributions attract tax relief at your marginal rate. If you pay into a personal pension (such as a SIPP), you get basic rate tax relief automatically, and higher rate taxpayers can claim additional relief through Self Assessment. Pension contributions are not an allowable business expense, but they do reduce your taxable income and therefore your income tax bill.
HMRC requires you to keep records of all business income and expenses for at least five years after the January Self Assessment deadline for the relevant tax year. This includes invoices, bank statements, receipts and mileage logs. HMRC can inspect records going back up to six years in some circumstances, so thorough record-keeping protects you in an enquiry.
For informational purposes only · Not financial advice · Tax rates shown are for 2026/27