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 2025-26 tax year
What’s in this guide?
- Sole trader tax vs. limited company tax
- Registering as self-employed
- Allowable business expenses
- Self Assessment tax returns
- What are payments on account?
- Self-employed tax – how much will I pay?
- National Insurance Contributions (NICs)
- Other types of tax – VAT
- Open a separate business bank account
- Keep accurate financial and business records
- Online accounting software is a big help
- Practical tip: set money aside
Sole trader tax vs. limited company tax
One of the most fundamental differences between the two business structure types 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. Company directors also complete an annual self assessment return to cover income they receive from all sources during the tax year.
All self-employed people (sole traders and partners in a partnership) are taxed annually via self-assessment.
They pay income tax and National Insurance Contributions on their business profits after deductions for expenses.
Registering as self-employed
It is very quick and easy to register as self employed.
For full details of what the process involves, read these helpful guides;
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 a mixed use you can show a definite proportion that relates to business.
Common examples include raw materials, tools and equipment, marketing, professional fees (accountant or solicitor), office costs (rent and utilities), 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 (the tax treatment may be via capital allowances, but it is deductible in computing taxable profit).
Example 2: using your car for business and personal
You drive to client meetings but also use the car for family trips. You cannot claim 100% of purchase and running costs. Track mileage and apportion. If 40% of total miles are business, you can claim 40% of allowable costs. Mileage-tracking apps like MileIQ or Tripcatcher make this easy. Alternatively, you can use HMRC’s approved mileage rates.
Meals and the overnight travel exception
Business lunches are generally not allowable because you would need to eat anyway, so you cannot split a clear business proportion. However, if you are travelling wholly and exclusively for business and must stay away from home overnight, reasonable costs of food and drink for that trip can be claimed.
Self Assessment Tax Returns
After registering as self-employed, you should automatically receive a self-assessment reminder following the end of each tax year, which runs from 6 April to 5 April every year.
The days of submitting a paper tax return are almost behind us. HMRC stopped sending out paper returns to the under-70s from April 2023 onwards.
You can submit your return online, or ask an accountant to do this for you.
Find out more at HMRC’s Self Assessment Online.
The deadline for submitting a return online is 31st January after the end of the tax year you’re accounting for.
For example, for the tax year running from 6th April 2024 to 5th April 2025, you will have until 31st January 2025 to submit it.
Importantly, note that you need to pay any tax liabilities you owe by the same 31st January deadline.
Read our guide to self assessment.
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 31st January and 50% by 31st July. If you are new to Self Assessment, this can make your first payment larger than expected.
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.
Self-employed tax – how much will I pay?
For the 2025/6 tax year, the personal allowance remains £12,570. This is the amount you can earn before paying any income tax at all.
For income in 2025/26 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 £150,000
- The Additional Income Tax rate of 45% on income over £125,140.
Try our sole trader tax calculator to calculate your tax bill for the 2025/26 tax year.
National Insurance Contributions (NICs)
In addition to income tax, as a sole trader, you also need to make National Insurance Contributions (NICs). The amount you have to pay depends on the level of your earnings.
There are currently two types of NICs that the self-employed have to pay.
Class 2 and Class 4 NICs
Class 2 NICs – £3.50 per week – are now voluntary.
If your profits are above £6,845, Class 2 NICs are deemed to have been paid already, and you don’t need to make any voluntary contributions.
However, if your annual profits are £6,845 or less, you should pay Class 2 NICs to ensure the current tax year counts towards your State Pension entitlement.
Class 4 NICs are based on your business’s profit: 6% on your earnings between £12,570 and £50,270 and 2% on any profits above this.
HMRC will calculate the amount of Class 4 NICs you are liable for at self assessment time.
Other types of tax – VAT
The self-assessment process will take care of most of your tax obligations. It includes details of any income you have received from savings and investments, asset disposal, or property rental.
If your business’s turnover is more than £90,000 (2025/26) over a 12-month period, you must also register for Value Added Tax (VAT).
When you are VAT-registered, you must add VAT to all your bills. You can also reclaim the VAT you have paid on business costs.
In some circumstances, it may be beneficial to register your business for VAT, even if your turnover is below the VAT threshold.
This is usually the case if most of your clients are business customers who can reclaim the VAT you charge them.
Open a separate business bank account
There is no legal requirement for the self-employed to have a separate business bank account. But there are some good reasons to do so.
Having a separate account helps keep accurate records and split your business and personal spending.
Even if you want to use your personal bank account for business purposes, many banks will prevent you from doing so if the number of transactions increases significantly.
Most high-street banks offer 12 to 18 months of free banking for new businesses.
After this, you’ll typically be charged a monthly account fee of around £6.50/month for a business current account, plus transaction fees.
Read our guide to choosing a sole trader bank account.
These days, there are plenty of alternatives to the high street names. And often they offer completely free banking.
Tide business account – £50 cashback
As a Bytestart visitor, you can take advantage of an excellent promotion running for a limited time.
Simply open a Tide business account, and you will qualify for £50 cashback – even if you use it as a secondary account.
Keep accurate financial and business records
Aside from managing your business cash flow, keeping clear and accurate records of all your sales and expenses is crucial to the survival of your new business.
Keep all your receipts, invoices, bank statements, and other paperwork in a safe place.
Find out how long you have to keep your business records here.
Online accounting software is a big help
These days, online accounting software can massively simplify the financial side of things and save you time.
Most include a facility to create and send invoices, track payments, link directly to your bank account, log expenses, and automatically calculate your VAT.
Some online accounting packages offer free trials, allowing you to try them out and determine whether they suit your needs and business. This includes our software of choice (we’ve used it for over ten years) – FreeAgent.
Our guide on choosing the best online accounting software explains how online accounting works in practice.
Practical tip: set money aside
A simple habit that helps avoid surprises at year end is to move a portion of each invoice into a separate savings pot for tax. Many sole traders use a flat 30% as a starting point and adjust once they know their typical expense levels and tax band.
Remember to get professional advice from a qualified person before taking any action. Don’t rely purely on the information contained in this article.
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