Self-employed tax in the UK: what a sole trader actually pays
Money · 5 min read
Going self-employed means you're now responsible for working out and paying your own tax. There's no payroll department doing it quietly in the background. This guide walks through what a typical sole trader actually owes in the 2025/26 tax year, and how the pieces fit together.
The basic shape of self-employed tax
As a sole trader, you pay Income Tax on your profit, not your turnover. Profit is what's left after you deduct allowable business expenses from the money your business brings in. You also pay Class 4 National Insurance on that same profit, and a small flat-rate Class 2 charge if your profits are above a low threshold.
There's no separate 'self-employment tax' as such. It's the same Income Tax system everyone else uses, just declared through a Self Assessment tax return instead of being deducted automatically by an employer.
The personal allowance and tax bands for 2025/26
For 2025/26, most people get a tax-free Personal Allowance of £12,570. You only pay Income Tax on profit above that. The basic rate of 20% applies to profit between £12,570 and £50,270, and the higher rate of 40% kicks in above that, up to £125,140, where the additional rate of 45% takes over.
If your total income (including anything outside self-employment) goes above £100,000, your Personal Allowance starts shrinking, by £1 for every £2 over that threshold. It disappears entirely once income reaches £125,140. This is worth planning around if you're close to that line.
National Insurance for the self-employed
Class 4 National Insurance is charged on profits above £12,570, at 6% up to £50,270, and 2% on anything above that. Class 2 National Insurance, which used to be a small weekly flat fee, has effectively been folded away for most people, though you can still pay it voluntarily to protect your State Pension record if your profits are low.
It's easy to forget National Insurance when you're mentally budgeting just for 'Income Tax'. Together, Income Tax and Class 4 NI can add up to a noticeably bigger bite than employees expect when they first go self-employed.
What counts as an allowable expense
Allowable expenses are costs that are wholly and necessarily for running your business. That includes things like a proportion of your home office costs, software subscriptions, business insurance, travel to client sites, and accountancy fees.
Personal costs, everyday clothing, and client entertaining generally don't qualify. HMRC does allow simplified flat-rate expenses for things like working from home and business mileage, which can save you from having to track every receipt down to the penny.
Keeping clean records from day one, even in a simple spreadsheet, makes your year-end return far less stressful and reduces the chance of overpaying or underclaiming.
Working out an estimate quickly
A rough way to sanity-check your own numbers is to take your expected annual profit, subtract the Personal Allowance, and apply the relevant band rates to what's left, then add Class 4 National Insurance on top using the same profit figure. A self-employed tax calculator can do this instantly and is a useful gut-check before you commit to spending decisions during the year.
Remember any figure you get this way is an estimate. Your actual liability depends on your exact profit, any other income, pension contributions, and reliefs specific to your situation.
Payments on account explained
One of the biggest shocks for new sole traders is 'payments on account'. If your tax bill is over £1,000 and less than 80% of your tax is collected at source, HMRC asks you to pay half of next year's estimated bill in advance, split across two payments, on top of what you already owe for the year just finished.
That means your first Self Assessment bill can be roughly one and a half times your actual tax for the year. Setting money aside monthly, rather than waiting until January, protects you from this cash-flow squeeze.
How much to set aside from each invoice
A common rule of thumb is to put aside 25-30% of everything you're paid into a separate savings account the moment it lands, more if you're a higher-rate taxpayer or VAT registered. It's better to over-save slightly and have spare cash at year-end than to come up short in January.
Some people automate this with a standing order the day after invoices are typically paid. It removes the temptation to treat gross income as spendable income.
Registering and reporting deadlines
You need to register for Self Assessment with HMRC by 5 October following the tax year in which you started trading. The tax year runs 6 April to 5 April. Your online return and payment are then due by 31 January the following year, with the second payment on account due by 31 July.
Missing these dates triggers automatic penalties, starting at a fixed amount and growing with interest the longer the return or payment stays outstanding. Diarising the dates well in advance is the simplest way to avoid them.
VAT: when it becomes relevant
If your taxable turnover goes above the VAT registration threshold, currently £90,000, in any rolling 12-month period, you must register for VAT. Below that, you can register voluntarily, which sometimes makes sense if your clients are VAT-registered businesses that can reclaim the VAT you charge them.
VAT is a separate system from Income Tax and National Insurance, with its own returns, usually quarterly. It adds administrative overhead, so it's worth thinking through before you approach the threshold rather than after.
Common questions
- Do I pay tax on turnover or profit?
- You pay tax on profit, meaning turnover minus allowable business expenses. Two sole traders with the same turnover can owe very different amounts of tax depending on their costs. This is an estimate based on general rules; your own figures will vary, and this isn't financial advice.
- How much should I save for tax as a sole trader?
- Many people set aside 25-30% of income as a starting estimate, adjusting upward if they're likely to be a higher-rate taxpayer. A self-employed tax calculator gives a more tailored figure based on your actual expected profit for the year.
- What is Class 4 National Insurance?
- It's the National Insurance sole traders pay on profits above £12,570, at 6% up to £50,270 and 2% above that for 2025/26. It's charged alongside, not instead of, Income Tax, and both are collected through your Self Assessment return.
- What happens if I miss the Self Assessment deadline?
- HMRC applies an automatic penalty for a late return, even if you owe no tax, plus further penalties and interest the longer it remains outstanding. It's worth filing early if you can, since the deadline for online returns is 31 January.
- Can I claim for working from home?
- Yes, sole traders can claim a proportion of home costs like heating and internet, either using HMRC's simplified flat rates or by calculating actual costs apportioned to business use. Keep this consistent year to year and be ready to show your reasoning if asked.