The short answer
Your tax is based on your profit: turnover minus allowable expenses. On that profit you pay:
- Income Tax at 0% on the first £12,570, 20% up to £50,270, 40% up to £125,140 and 45% above (different bands in Scotland);
- Class 4 National Insurance at 6% on profit between £12,570 and £50,270, and 2% above.
| Profit | Income Tax | Class 4 NI | You keep | Share in tax |
|---|---|---|---|---|
| £20,000 | £1,486 | £446 | £18,068 | 9.7% |
| £30,000 | £3,486 | £1,046 | £25,468 | 15.1% |
| £40,000 | £5,486 | £1,646 | £32,868 | 17.8% |
| £50,000 | £7,486 | £2,246 | £40,268 | 19.5% |
| £75,000 | £17,432 | £2,757 | £54,811 | 26.9% |
| £100,000 | £27,432 | £3,257 | £69,311 | 30.7% |
| £150,000 | £53,703 | £4,257 | £92,040 | 38.6% |
Working out your profit
Profit is everything you earned from the business in the tax year, 6 April to 5 April, minus the allowable expenses of running it. Most sole traders use the cash basis: count money when it arrives and costs when you pay them.
Allowable expenses are costs incurred wholly and exclusively for the business: stock and materials, tools, business travel, phone and internet, insurance, accountancy, advertising, and a share of home costs if you work from home. Your own drawings are not an expense. The allowable expenses calculator goes through each category.
The £1,000 trading allowance
Instead of claiming actual expenses you can deduct a flat £1,000. If your total turnover is £1,000 or less, it is completely tax-free and you do not need to register. Above that, choose whichever is bigger: the allowance or your real costs.
- Claiming actual expenses£2,600 profit at 20%£520 tax
- Claiming the trading allowance£2,000 profit at 20%£400 tax
Income Tax on your profit
Your profit is added to any other income, such as a salary, pension or rent, and taxed at the normal rates. Your Personal Allowance of £12,570 is used first, then the bands below.
| Band | Income | Rate |
|---|---|---|
| Personal Allowance | Up to £12,570 | 0% |
| Basic rate | £12,571 to £50,270 | 20% |
| Higher rate | £50,271 to £125,140 | 40% |
| Additional rate | Over £125,140 | 45% |
The Personal Allowance shrinks by £1 for every £2 of income over £100,000, and is gone at £125,140. That creates an effective 60% Income Tax rate between those figures. In Scotland, six bands apply from 19% to 48%; Class 4 NI is the same everywhere.
National Insurance
Two classes of National Insurance apply to the self-employed:
- Who pays
- Profit over £12,570
- Rate
- 6% to £50,270, then 2%
- How
- Through Self Assessment
- Who pays
- Nobody has to
- Profit £7,105+
- Credit given free
- Below £7,105
- Optional £3.65 a week
Class 2 used to be compulsory. Since April 2024, if your profit is at least the Small Profits Threshold of £7,105, you get a National Insurance credit towards your State Pension without paying anything. Below that, you can choose to pay voluntary Class 2 at £3.65 a week, £189.80 for the year, to keep the year on your record. That is far cheaper than voluntary Class 3 contributions.
Class 4 is lower than employee NI
Employees pay 8% between £12,570 and £50,270. The self-employed pay 6% on the same slice, which is one reason a sole trader keeps more of £40,000 than an employee on the same salary.
Your rate on each extra pound
The share of your total profit that goes in tax is lower than the rate on your next pound, because the first £12,570 is tax-free. When you decide whether a job is worth taking or an expense is worth buying, the rate on the next pound is the one that matters.
So a £1,000 allowable expense saves a basic-rate sole trader £260, a higher-rate one £420, and someone in the £100,000 to £125,140 band £620.
Self-employed alongside a job
If you have a job as well, your salary uses up your Personal Allowance and some of your tax bands first. Your profit sits on top, so it is taxed at your highest rate. Class 4 NI, though, looks only at your self-employed profit.
| Salary | Income Tax on the profit | Class 4 NI | You keep |
|---|---|---|---|
| £30,000 | £2,000 | £0 | £8,000 |
| £60,000 | £4,000 | £0 | £6,000 |
The Class 4 figure is zero because £10,000 of profit is below the £12,570 lower limit, whatever your salary. Your employer’s PAYE covers the tax on your salary; the tax on your profit is paid through Self Assessment, or sometimes collected through your tax code if you ask HMRC.
Student loans, Scotland and pensions
Student loans
Student loan repayments for the self-employed are worked out in Self Assessment, at your plan’s rate on total income above its threshold. On £40,000 of profit with a Plan 2 loan, that is 9% of £10,615, or £955 a year, on top of tax and NI.
Scotland
Scottish taxpayers pay Scottish Income Tax on their profit. At £40,000 that is £5,551 instead of £5,486, about £65 more. Above £43,663 the 42% rate starts, so the gap widens for higher profits.
Pension contributions
Personal pension contributions get tax relief at your top rate. You pay in 80%, the provider claims 20% from HMRC, and any higher-rate relief comes off your Self Assessment bill.
- You pay in£8,000
- Provider claims from HMRC+£2,000
- Income Tax without the pension£15,432
- Income Tax with the pension£13,432
At £110,000 of profit, the same contribution cuts Income Tax by £4,000 on top of the £2,000 basic relief, because it also brings back part of your Personal Allowance.
Registering, filing and paying
- 5 October 2027Register for Self Assessment
If 2026/27 is your first year with self-employed turnover over £1,000.
- 31 October 2027Paper return deadline
Most people file online instead.
- 31 January 2028Online return and payment
File the 2026/27 return and pay the balance, plus your first payment on account for 2027/28.
- 31 July 2028Second payment on account
Half of the 2026/27 Income Tax and Class 4 bill, towards 2027/28.
A return filed late gets an automatic £100 penalty, with more after three, six and twelve months. Interest is charged on late tax at the Bank of England base rate plus 4%. The payment on account calculator sets out every date for your own figures. If you are in Making Tax Digital, late submissions earn penalty points instead, and late payment penalties are a percentage of the tax unpaid after 15 and 30 days.
The first-year cash trap
Self Assessment tax is paid after the year ends, so in your first year there is no tax to pay for many months. Then, on the first 31 January, two things fall due together: the whole of the first year’s bill and the first payment on account for the next year.
- Income Tax and Class 4 for the year£7,132
- First payment on account for next yearHalf of £7,132£3,566
- Due on the first 31 January£10,698
- Second payment on account, 31 July£3,566
Plan for 150%
In your first January you pay about one and a half years’ tax at once. Save from your first invoice, ideally into a separate account, so the money is there.
Making Tax Digital
Making Tax Digital for Income Tax started on 6 April 2026. Sole traders and landlords whose combined self-employment and property income (turnover, not profit) was over £50,000 in 2024/25 must now:
- keep their business records in compatible software;
- send HMRC a summary of income and expenses every quarter;
- file a final declaration after the year ends, by 31 January as before.
The threshold falls to £30,000 from April 2027 and £20,000 from April 2028. The quarterly updates do not change how much tax you pay or when you pay it.
How much to set aside
A simple rule is to save a percentage of every payment you receive. The right figure depends on your profit and your other income:
- Profit under £12,570, no other income: little or nothing, though you may still want to save for the year ahead.
- Profit of £20,000 to £50,000: about 15% to 20% of profit.
- Higher-rate profit, or self-employment on top of a well-paid job: 30% to 40% of profit.
At £40,000 of profit, putting aside about £594 a month covers the year’s tax. In your first year, aim higher to cover the first payment on account as well.
Sole trader or limited company?
As profits grow, many sole traders wonder whether a limited company would save tax. A company pays Corporation Tax on its profit, and you take money out as a small salary plus dividends. The saving depends on how much you take out and on the extra costs of running a company: accounts, a Corporation Tax return, a confirmation statement and stricter rules on what is yours and what is the company’s.
Dividend tax rose to 10.75% and 35.75% in April 2026, which has narrowed the gap. Compare your own figures with the dividend vs salary calculator and the Corporation Tax calculator before deciding.
Your accounting year
Since the 2024/25 tax year, sole traders are taxed on the profit that falls within the tax year itself, 6 April to 5 April. If your accounts run to a different date, such as 31 December, you apportion profits from two sets of accounts to arrive at the tax-year figure.
Most new sole traders find it simplest to make their accounts run to 5 April, or to 31 March, which HMRC treats as the same as 5 April. Then your accounts and your tax return cover the same period, and there is no apportioning to do.
If you make a loss
If your allowable expenses are more than your turnover, you make a trading loss and there is no tax on the business for that year. You can use the loss in several ways:
- set it against your other income, such as a salary, in the same tax year or the year before;
- in the first four years of trading, carry it back against income from the three years before;
- carry it forward against future profits from the same business.
Some of these reliefs are capped for larger amounts, and losses from a business not run on a commercial basis cannot be set against other income. If your loss is large, an accountant can help you choose the best use.