Self-employed tax explained: what you pay and when

As a sole trader you pay, through one Self Assessment return:

• Income tax on your profits — the same £12,570 personal allowance and 20/40/45% bands as employees (Scottish rates if you live in Scotland);
• Class 4 National Insurance — 6% of profits between £12,570 and £50,270, and 2% above that.

Class 2 NI — the old flat weekly charge — no longer needs to be paid: profits above the small-profits threshold earn your State Pension credits automatically, and below it you can pay Class 2 voluntarily to protect your record.

Note this is the sole-trader picture. Running a limited company is a different regime (corporation tax, salary + dividends) with its own trade-offs.

Tax is charged on turnover minus allowable expenses. Common allowable costs include:

• stock, materials and direct costs of sales;
• travel (but not ordinary commuting), vehicle running costs or the approved mileage rate;
• phone, internet, software, insurance and professional fees;
• a reasonable proportion of home costs if you work from home (or HMRC’s flat rate);
• marketing, training that updates existing skills, and bank charges.

Every legitimate expense you record saves tax at your marginal rate — for a basic-rate trader, 26p per £1 (20% tax + 6% Class 4). Keep records for at least five years; and if your gross trading income is under £1,000 a year, the trading allowance may mean no tax and no return at all.

Say you invoice £55,000 and claim £10,000 of expenses — profit £45,000:

That’s an effective rate of 18.7% on profit, leaving take-home of about £36,568 — and it means setting aside roughly £703 a month as you earn. Run your own turnover and expenses through the Self-Employed Tax Calculator, which also handles employment income alongside, pension contributions and student loans.

If your bill is over £1,000 (and mostly not collected at source), HMRC requires payments on account — advance instalments towards next year, each 50% of this year’s bill.

For the £45,000-profit example, the first year looks like this:

So the first January demands 150% of the annual bill — the single biggest cashflow trap in self-employment. From year two onwards you’re only ever topping up (or reclaiming) the difference. If you know profits will fall, you can apply to reduce payments on account — but reduce them too far and HMRC charges interest on the shortfall.

The dates that matter:

• 5 October — register for Self Assessment after your first self-employed tax year;
• 31 January — online return deadline and payment of the balance + first payment on account;
• 31 July — second payment on account;
• Late filing starts at a £100 penalty, with interest on late payment.

And a big recent change: from April 2026, Making Tax Digital applies to sole traders and landlords with qualifying income over £50,000 — digital record-keeping and quarterly updates to HMRC through compatible software, with lower thresholds following. If that’s you, get software in place now rather than at the deadline.

Employed and self-employed? Your employment income uses up your personal allowance and basic-rate band first, so self-employed profits are often taxed from the first pound — sometimes at 40%. PAYE tax already paid is credited on your return, and the calculator handles the combination if you enter both.

For small side incomes: under £1,000 of gross trading income a year is covered by the trading allowance (nothing to report in most cases); above it, you register and report — even if you also have a full-time job. Online platforms now report sellers’ income to HMRC, so don’t rely on staying invisible.

1. Claim every allowable expense — the most common money left on the table; even the flat-rate home-working and mileage options beat claiming nothing.
2. Pension contributions — extend your basic-rate band, so profit that would be taxed at 40% is taxed at 20% instead. The calculator has a field for this.
3. Time big purchases — equipment bought just before your year-end brings the deduction forward a whole year.
4. Use the right structure — at higher profits, a limited company can (not always) be more efficient; take advice before switching.
5. File early — you don’t pay sooner, but you know January’s number months in advance.