In this guide, we look at the taxes the self-employed pay and some common mistakes to avoid when dealing with HMRC.
This guide has been updated for the 2026/27 tax year.
What’s in this guide?
- How does sole trader tax work?
- Self-employed tax – how much will I pay?
- National Insurance Contributions (NICs)
- Allowable business expenses
- Registering as self-employed
- Self Assessment tax returns
- Making Tax Digital for Income Tax
- Payments on account
- VAT
- Practical tip: set money aside
How does sole trader tax work?
One of the most fundamental differences between being a sole trader and running a limited company is how each is taxed.
A limited company is taxed as a separate legal entity from its owners and directors.
Sole traders (and partners in partnerships) and their business are taxed as one single entity.
Limited companies pay Corporation Tax on their annual profits.
If you are self-employed as a sole trader, you pay Income Tax and National Insurance Contributions on your business profits after deductions for allowable expenses.
You normally deal with your tax through Self Assessment, although Making Tax Digital for Income Tax is now changing how many sole traders keep records and report information to HMRC.
Self-employed tax – how much will I pay?
For the 2026/27 tax year, the personal allowance remains £12,570. This is the amount you can earn before paying any income tax.
For income above this threshold, you are taxed as follows:
- the basic Income Tax rate of 20% on income between £12,571 and £50,270
- the higher Income Tax rate of 40% on income between £50,271 and £125,140
- the additional Income Tax rate of 45% on income over £125,140.
These bands apply to England, Wales and Northern Ireland. Different Income Tax bands apply in Scotland.
Remember that you are taxed on your profit, rather than your turnover. Broadly speaking, this is your business income after allowable business expenses have been deducted.
Try our sole trader tax calculator to get an idea of your Income Tax and National Insurance bill.
National Insurance Contributions (NICs)
In addition to Income Tax, as a sole trader, you may also need to make National Insurance Contributions (NICs). The amount you have to pay depends on the level of your profits.
There are currently two types of NICs relevant to the self-employed.
Class 2 and Class 4 NICs
Class 2 NICs – £3.65 per week – are now voluntary.
If your profits are £7,105 or more, Class 2 NICs are treated as having been paid, so you don’t need to make voluntary contributions.
However, if your annual profits are below £7,105, you can choose to pay Class 2 NICs to help protect your National Insurance record and State Pension entitlement.
Class 4 NICs are based on your business profits: 6% on profits between £12,570 and £50,270, and 2% on profits above this.
HMRC will calculate the amount of Class 4 NICs you are liable for through Self Assessment.
Allowable business expenses
Allowable expenses are business costs you can deduct from revenue to arrive at your taxable profit. HMRC’s test is the “wholly and exclusively” rule.
In short, an expense is allowable if it is purely for the business, or where there is mixed use, you can show a definite proportion that relates to business.
Common examples include raw materials, tools and equipment, marketing, professional fees such as accountant or solicitor costs, office costs, insurance, training and bank charges.
Example 1: photographer’s equipment
You shoot weddings and events and invest in a high-end camera body and lenses. This is essential to your trade and passes the “wholly and exclusively” test.
The cost is an allowable business expense, although the tax treatment may be via capital allowances.
Example 2: using your car for business and personal use
You drive to client meetings but also use the car for family trips. You cannot claim 100% of the purchase and running costs.
If you use the actual-cost method, you need to work out the business proportion of your allowable costs.
Alternatively, you can use HMRC’s approved mileage rates, provided you meet the conditions for using simplified expenses.
Meals and the overnight travel exception
Everyday meals are generally not allowable simply because you are working – you would need to eat anyway.
There are circumstances where reasonable food and drink costs can be claimed when you are travelling for business. Read our guide to subsistence expenses for more detail.
Registering as self-employed
It is very quick and easy to register as self-employed.
If your gross trading income is more than the £1,000 trading allowance during the tax year, you will normally need to tell HMRC about your self-employment and register for Self Assessment.
For full details of what the process involves, read our guide to registering as self-employed.
You can also read our guide to how to become self-employed if you are just starting out.
Self Assessment tax returns
After registering as self-employed, you will normally need to complete a Self Assessment tax return following the end of each tax year, which runs from 6 April to 5 April.
You can submit your return online yourself or ask an accountant to do this for you.
The deadline for submitting an online return is 31 January after the end of the tax year you’re accounting for.
For example, for the tax year running from 6 April 2025 to 5 April 2026, you have until 31 January 2027 to submit it.
Importantly, you need to pay any tax liabilities you owe by the same 31 January deadline.
Read our guide to Self Assessment for more details.
Making Tax Digital for Income Tax
Making Tax Digital (MTD) for Income Tax is now changing the way many sole traders deal with HMRC.
From 6 April 2026, self-employed people and landlords with more than £50,000 of qualifying gross income are required to use MTD for Income Tax. The threshold falls to £30,000 from April 2027.
If the rules apply to you, you need to:
- keep digital records of your business income and expenses
- use software that works with Making Tax Digital
- submit quarterly updates to HMRC
- complete the required year-end reporting.
Importantly, the thresholds are based on your qualifying gross income, rather than your taxable profit. If you have both self-employed and property income, the relevant income is combined when HMRC works out whether you have crossed the threshold.
If you are affected, read our full guide to Making Tax Digital for the self-employed.
We also have a practical guide explaining how to register for Making Tax Digital for Income Tax, including the information you need before signing up and the quarterly reporting deadlines.
You will need suitable digital record-keeping software if MTD applies to you. Our guide explains how accounting software works under Making Tax Digital.
Payments on account
Once you have started to pay tax through the annual Self Assessment system, you may also need to make ‘payments on account’ – advance payments towards your next tax bill, based on the amount you owed the previous year.
They are normally paid in two instalments each year: 50% by 31 January and 50% by 31 July.
If you are new to Self Assessment, your first January payment can be much larger than expected because you may be paying the tax you owe for the previous year plus your first payment on account for the following year.
If you believe your income for the following year will be lower, you can apply to HMRC to reduce these payments. If you are late filing or paying, HMRC will charge penalties and interest.
For a detailed explanation of how payments on account work, including worked examples, see our Self Assessment guide.
What about VAT?
Self Assessment covers your Income Tax and National Insurance, but VAT is dealt with separately.
If your business’s taxable turnover is more than £90,000 over a rolling 12-month period, you must normally register for VAT.
When you are VAT-registered, you normally add VAT to taxable sales. You can also reclaim VAT you have paid on eligible business costs.
In some circumstances, it may be beneficial to register your business for VAT voluntarily, even if your turnover is below the VAT threshold.
This may be the case if most of your clients are VAT-registered businesses that can reclaim the VAT you charge them.
Practical tip: set money aside for tax
A simple habit that helps avoid unwelcome surprises at year-end is to move a portion of each invoice into a separate savings pot to pay your next tax bill.
Many sole traders use 30% as a rough starting point and adjust the amount once they know their typical expenses and tax band.
This is particularly useful in your first year, when payments on account can make your first January tax bill larger than expected.
Remember to get professional advice from a qualified person before taking any action. Don’t rely purely on the information contained in this article.