Self-Employed Tax: How It Works and What You Need to Know

Tax is the bit most people worry about most when they go self-employed. It’s also the bit that turns out to be much more manageable than expected once you understand how it works.

I’m Anita — a Chartered Accountant who went self-employed myself. This guide explains exactly how self-employed tax works in the UK, what you’ll pay, when you’ll pay it, and how to make sure you’re not paying more than you need to.

Disclaimer: I’m an accountant, but I’m not your accountant. This guide is for information purposes only — everyone’s situation is different. If you’re unsure about anything specific to your circumstances, speak to a qualified professional. This guide covers sole trader tax. Different rules apply if you trade through a Limited Company.

1. How Does Self-Employed Tax Work?

If you’ve been employed before, you’re used to tax being sorted automatically through your payslip — your employer deducts Income Tax and National Insurance before you’re paid, and passes it to HMRC on your behalf.

When you’re self-employed, that no longer happens. You’re responsible for:

• Tracking your business income and expenses
• Declaring your profits to HMRC each year
• Working out what you owe and paying it

The system HMRC uses to collect tax from self-employed people is called Self Assessment.

2. What Is Self Assessment?

Self Assessment is HMRC’s system for collecting tax on income that hasn’t been taxed at source — including self-employment profits, rental income, and investment income.

As a sole trader, your clients and customers pay you without deducting any tax. Self Assessment is how you report that income to HMRC at the end of each tax year and settle what you owe.

It means:

• Registering with HMRC as self-employed — you must do this by 5 October following the tax year you started working for yourself
• Keeping digital records — Making Tax Digital (MTD) now requires sole traders earning over £50,000 to use MTD-compatible software and submit quarterly updates to HMRC; the threshold drops to £30,000 in April 2027 and will eventually cover all sole traders
• Filing an annual return — either via a traditional Self Assessment tax return or, under MTD, via a final declaration at the end of the tax year
• Paying your tax and National Insurance bill — based on your taxable profits

Read => How to Register as Self-Employed in the UK

3. How Do You Report Your Income to HMRC?

There are now two ways, depending on your income level.

Traditional Self Assessment — if your self-employment income is below the MTD** threshold, you file an annual Self Assessment tax return. It covers all your income sources for the previous tax year, and HMRC calculates what you owe once you’ve entered your figures. You submit it online by 31 January each year.

** Making Tax Digital (MTD) — if your self-employment income is over £50,000 (from April 2026), you’re now required to use MTD-compatible software, keep digital records, and submit quarterly updates to HMRC throughout the year. At the end of the year you submit a final declaration instead of a traditional tax return. The threshold drops to £30,000 from April 2027.

Whichever route applies to you, the underlying principle is the same: you report your income and expenses to HMRC and pay tax on your profits.

Key deadlines:

• 5 October — deadline to register for Self Assessment if you haven’t already
• 31 January — online tax return or MTD final declaration deadline; tax bill due; first payment on account due
• 5 April — end of the tax year

The tax year runs from 6 April to 5 April each year. So the return or final declaration due by 31 January 2027 covers income earned between 6 April 2025 and 5 April 2026.

Miss the 31 January deadline and HMRC issues an automatic £100 penalty — even if you don’t owe any tax. Don’t leave it to the last minute.

Read => Making Tax Digital: What Sole Traders Need to Know

4. What Taxes Do Self-Employed People Pay?

As a sole trader, you pay two main taxes on your business profits:

Income Tax

Charged on your taxable profits above the personal allowance.

Class 4 National Insurance (NICs)

Charged on your taxable profits above the Lower Profits Limit — in addition to Income Tax.

Both are based on profit, not turnover. Profit means your total business income minus your allowable business expenses.

What About Class 2 National Insurance?

Class 2 NICs were made voluntary from April 2024. Most self-employed people no longer pay them — but if your profits are below the Small Profits Threshold (£6,845 for 2026/27), you can choose to pay Class 2 voluntarily at £3.50 per week to protect your State Pension entitlement and access to certain benefits. Worth considering if you’re in the early years of your business with lower profits.

What About VAT?

VAT is separate and only applies if your taxable turnover exceeds £90,000 in any rolling 12-month period — at that point, registration becomes compulsory. You can also register voluntarily before you hit the threshold, which can make sense if your clients are VAT-registered businesses.

5. Self-Employed Tax Rates 2026/27

Income Tax

Income tax is charged on your profits above the personal allowance. The personal allowance for 2026/27 is £12,570.

Here are the Income Tax bands for 2026/27 in England and Wales:

Note: Scottish taxpayers have different Income Tax rates and bands. If you’re based in Scotland, check the Scottish Government’s rates.

Personal Allowance taper: Once your income exceeds £100,000, you begin to lose your personal allowance — £1 for every £2 earned above that threshold. It disappears entirely at £125,140.

Income Tax example: Your taxable business profits for 2026/27 are £40,000. You have no other income. Your Income Tax bill is £5,486:

• 0% on the first £12,570
• 20% on the remaining £27,430 = £5,486

Income Tax example — employed and self-employed: You earn £40,000 gross from employment and £20,000 from your business. Your total taxable income is £60,000. Your Income Tax bill is £11,432:

• 0% on the first £12,570
• 20% on the next £37,700 = £7,540
• 40% on the remaining £9,730 = £3,892

Your combined income pushes you into the higher rate band — something to be aware of if you have both employment and self-employment income.

Class 4 National Insurance

Class 4 NICs are paid in addition to Income Tax on your taxable business profits. The rates for 2026/27 are:

Class 4 NIC example: Your taxable business profits are £40,000 for 2026/27. Your Class 4 NIC bill is £1,645.80:

• 0% on the first £12,570
• 6% on the remaining £27,430 = £1,645.80

Combined tax and NIC on £40,000 profits: Income Tax: £5,486 + Class 4 NICs: £1,645.80 = £7,131.80 total

That’s an effective rate of around 18% on £40,000 of profit — worth bearing in mind when setting aside money for your tax bill.

6. What Can I Claim as Expenses?

This is one of the most valuable things to get right. Allowable business expenses reduce your taxable profit — which means you pay less tax.

How it works: Business profit = Business income − Allowable expenses

If your income is £50,000 and you have £10,000 of allowable expenses, you’re taxed on £40,000 — not £50,000.

Common allowable expenses for sole traders include:

• Travel — mileage, public transport, parking (but not commuting)
• Equipment — laptops, tools, machinery
• Software and subscriptions — accounting software, project management tools
• Marketing — website hosting, advertising, business cards
• Professional fees — accountant fees, legal advice
• Home office costs — a proportion of household bills if you work from home
• Training — courses and development directly related to your business

Keep receipts and records for at least five years in case HMRC asks for evidence.

Club tip: Good accounting software makes expense tracking effortless — and makes sure you never miss a legitimate deduction. Members of The Self Employed Club get exclusive discounts on Xero and other tools. See the current deals →

Read => Allowable Expenses for Sole Traders: The Full List

7. Self-Employed Tax Dates and Deadlines

Mark these in your diary every year:

Missing the 31 January deadline results in automatic penalties. Miss it by up to 3 months: £100. Miss it further and the penalties escalate quickly. It’s not worth the stress — file early.

8. Payments on Account

This is the one that catches most new sole traders off guard, so it’s worth understanding properly.

Once your tax bill exceeds £1,000, HMRC asks you to make advance payments towards the following year’s bill — called payments on account. You make two:

• 31 January — 50% of your previous year’s tax bill
• 31 July — another 50% of your previous year’s tax bill

Any overpayment is refunded after you file the following year’s return. Any underpayment is collected as a balancing payment.

What this means in practice: In your first year of self-employment, you pay your tax bill as normal in January. But HMRC also asks for a payment on account at the same time — meaning you could owe up to 150% of your first year’s tax bill in one January payment.

This surprises a lot of people. The best way to handle it is to set aside more than you think you’ll need from the start — around 25-30% of your profits is a sensible rule of thumb.

9. How to Make Tax Less Stressful

The honest answer: staying on top of it throughout the year rather than dealing with it all in January.

Six things that actually help:

1. Set aside money as you go — 25-30% of every payment you receive. Put it in a separate savings pot if you can. Don’t touch it.
2. Track expenses as they happen — not at tax return time. If you do it monthly, January becomes straightforward.
3. Use MTD-compatible accounting software — tools like Xero connect to your bank account, categorise transactions automatically, keep your records MTD-ready, and handle quarterly submissions if you’re already within the MTD threshold. Members of The Self Employed Club get 90% off Xero for 6 months →
4. Open a business bank account — keeping business and personal finances separate makes bookkeeping significantly easier and cleaner. Check business banking deals in the Club →
5. Consider an accountant — especially in your first year. A good accountant finds savings that more than cover their fee, and removes the stress entirely.
6. File early — you don’t have to pay any earlier, but filing in April or May means you know your bill months in advance and can plan for it.

Read => Making Tax Digital: What Sole Traders Need to Know

10. What If I Make a Mistake or Miss a Payment?

It happens. Here’s what to do:

If you miss the filing deadline: File as soon as possible. The £100 penalty is automatic, but the sooner you file, the lower any further penalties will be.

If you can’t pay your tax bill: Don’t ignore it. Contact HMRC directly and ask about a Time to Pay arrangement — they’ll let you spread the cost over monthly instalments. You need to have filed your return first before they’ll set this up.

If you made an error on your return: You can amend a submitted tax return within 12 months of the filing deadline. Log into your HMRC account and make the correction online.

If HMRC contacts you: Respond promptly. Most issues are straightforward if you engage with them early. Ignoring correspondence makes things worse.

HMRC’s general helpline: 0300 200 3300

11. Where to Get Help with Your Taxes

• HMRC’s tax calculator — for a rough estimate of your bill
• An accountant or tax adviser — especially useful in your first year or if your affairs are complicated
• Accounting software — Xero and similar tools keep your records clean and make the return process much simpler
• The Self Employed Club — free membership with deals on the tools and software that make self-employed life easier, including accounting software, business banking, and more

Join The Self Employed Club free →

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