Self-employed tax explained

Why self-employed tax works differently

Employees have tax worked out for them automatically through PAYE, deducted before the money ever reaches their bank account. Self-employed people don't have an employer doing that job, so instead you register for Self Assessment, work out your own profit, and tell HMRC about it yourself once a year. The tax year still runs 6 April to 5 April, but the deadline to file online and pay what you owe is 31 January after the tax year ends — so the 2026/27 tax year (6 April 2026 to 5 April 2027) needs to be filed and paid by 31 January 2028.

You need to register for Self Assessment by 5 October following the end of the tax year you first need to report, even if you don't owe very much — missing registration doesn't make the obligation disappear, it just means catching up later, often with penalties attached.

Income Tax on your profit

Self-employed Income Tax uses exactly the same Personal Allowance and bands as employees: £12,570 tax-free for 2026/27, then 20% up to £50,270 of total income, 40% up to £125,140, and 45% above that. The key difference is what's taxed — not your turnover, but your profit, meaning your income minus allowable business expenses like stock, equipment, travel for work, and a proportion of home office costs if you work from home.

A sole trader earning £60,000 in sales with £15,000 of allowable expenses has a taxable profit of £45,000, not £60,000 — Income Tax, and the Class 4 National Insurance covered below, are both worked out on that £45,000 figure.

Class 2 and Class 4 National Insurance

Self-employed NI is a separate system from the employee Class 1 NI covered elsewhere on this site. Class 2 NI used to be a small flat weekly charge, but for most self-employed people with profits above the Small Profits Threshold it no longer has to be paid — voluntary Class 2 payments are still possible below that threshold for people who want to protect their State Pension record.

Class 4 NI is the main self-employed NI charge, and it mirrors the employee system in structure: a main rate on profits between the Lower Profits Limit (£12,570) and the Upper Profits Limit (£50,270), and a lower rate on profits above that, with nothing due below £12,570. Always confirm the exact current rates on GOV.UK before filing, since self-employed NI rates have changed more than once in recent years.

Payments on account

This is the part that catches a lot of newly self-employed people out. If your Self Assessment bill is over £1,000 and less than 80% of it was already collected at source (for example through PAYE on another job), HMRC doesn't just ask for this year's bill — it asks for this year's bill plus half of next year's estimated bill in advance, split into two 'payments on account' due 31 January and 31 July.

In practice, this means your first tax bill as newly self-employed can be roughly one and a half times your actual liability for the year, because you're paying for the year just finished and getting a head start on the next one. It evens out in later years, but it's worth setting money aside for specifically, rather than being caught short by a bill that looks much bigger than expected.

A worked example: £45,000 profit

Take a sole trader with a £45,000 taxable profit for 2026/27, no other income. Income Tax: the £12,570 Personal Allowance leaves £32,430 taxable, all within the 20% basic-rate band, giving £6,486 of Income Tax. Class 4 NI: assuming a 6% main rate (check the current figure on GOV.UK), the same £32,430 of profit above the Lower Profits Limit is charged at 6%, giving roughly £1,945.80. Total tax and NI for the year: about £8,431.80 — before any payments on account are factored in for the following year.

Common mistakes

• Not setting aside money for payments on account — a first Self Assessment bill can be much bigger than expected because it includes an advance payment towards the following year.
• Mixing personal and business expenses in one bank account — this makes it harder to prove what's genuinely an allowable business expense if HMRC ever asks.
• Missing the 31 January filing and payment deadline — this triggers an automatic £100 penalty even if no tax is actually owed, with further penalties and interest the longer it's left.
• Forgetting to register for Self Assessment by 5 October after your first year of self-employment — the tax is still due even if you never registered, it just becomes harder to sort out later.
• Not keeping records for long enough — HMRC generally expects Self Assessment records to be kept for at least 5 years after the filing deadline for that tax year.