Self-employed tax explained: what you pay and when (UK)

You're taxed on profit, not income

Your income (or turnover) is everything customers pay you. Your profit is what's left after you take off allowable business expenses. Income Tax and National Insurance are both worked out on profit.

So if you invoice £40,000 in a year and spend £6,000 on running the business, you're taxed on £34,000, not £40,000. This is why tracking expenses properly matters. Every legitimate cost you forget to record means paying tax on money you didn't really make.

If your costs are tiny, you can use the £1,000 trading allowance instead of claiming expenses. You can't use both, so pick whichever gives the bigger deduction.

Allowable expenses: what you can claim

An allowable expense is a cost of running your business. If something is used partly for personal reasons, you can only claim the business share. For example, if half your phone bill is for work, you claim half.

Money you take out for yourself isn't an expense, and neither are everyday clothes, even if you wear them to meetings. Bigger items you keep, like equipment, machinery or a business vehicle, may be claimed through capital allowances or as an expense depending on how you do your accounts.

• Office costs, such as stationery, software and the business part of your phone bill
• Travel for work, such as fuel, parking and train fares (not your commute to a regular workplace)
• Stock and materials you buy to sell or use in what you sell
• Insurance, bank charges and accountancy fees
• Advertising, marketing and website costs
• Uniforms and protective clothing
• Training related to your current business

Simplified expenses and flat rates

Sole traders can use flat rates for a few costs instead of working out the exact figures. For working from home, the monthly flat rate depends on how many hours you work there: £10 for 25 to 50 hours, £18 for 51 to 100 hours, and £26 for 101 hours or more. It doesn't include phone or internet, which you claim separately based on business use.

For a car or van, you can claim a flat rate per business mile instead of actual running costs. For 2026 to 2027 it's 55p a mile for the first 10,000 business miles and 25p a mile after that. Motorcycles are 24p a mile. You'll need a log of your business trips.

Flat rates save time, but they're not always the bigger claim. If your real costs are higher, working them out properly may save you more.

Income Tax and National Insurance rates for 2026 to 2027

Income Tax is charged on your total income from all sources, so profit from self-employment is added to any salary, pension or rental income. The bands for England, Wales and Northern Ireland are in the list below.

Class 4 National Insurance is 6% on profits between £12,570 and £50,270 and 2% on profits above that. Class 2 no longer has to be paid. If your profits are £7,105 or more you're treated as having paid it, which keeps your State Pension record intact. Below that, voluntary Class 2 costs £3.65 a week. Scotland has its own Income Tax bands, from a 19% starter rate up to 48%, but National Insurance is the same across the UK.

• Personal Allowance: first £12,570 tax free (it reduces by £1 for every £2 of income over £100,000)
• Basic rate: 20% on £12,571 to £50,270
• Higher rate: 40% on £50,271 to £125,140
• Additional rate: 45% over £125,140

Payments on account: a first-year example

If your Self Assessment bill is more than £1,000, and less than 80% of your tax was already taken at source, HMRC asks for two payments on account towards the following year. Each one is half of last year's bill, and they're due on 31 January and 31 July. They include Class 4 National Insurance.

Say you started on 6 April 2026 and made a £30,000 profit in your first tax year, with no other income, in England. Income Tax is 20% of £17,430 (£30,000 minus £12,570), which is £3,486. Class 4 is 6% of the same £17,430, which is £1,045.80. Your bill for 2026 to 2027 is £4,531.80.

By 31 January 2028 you pay that £4,531.80 plus a first payment on account for 2027 to 2028 of £2,265.90, so £6,797.70 in total. On 31 July 2028 you pay the second payment on account of £2,265.90. That first January is the one that hurts, because you're paying for a year and a half at once. If you expect lower profits next year, you can ask HMRC to reduce your payments on account, but if you reduce them too far you'll pay interest on the difference.

Key dates and penalties

The tax year runs from 6 April to 5 April. Everything else hangs off that.

Miss the filing deadline and there's an immediate £100 penalty. After three months it's £10 a day, up to £900, with more after six and twelve months. Late payment adds penalties of 5% of the unpaid tax at 30 days, six months and twelve months, plus interest.

• 5 October: deadline to register for Self Assessment if you started in the previous tax year
• 31 October: deadline for paper tax returns
• 30 December: file online by this date if you want a bill under £3,000 collected through your tax code (only if you also have a job or pension taxed through PAYE)
• 31 January: deadline for online returns, paying the balance owed and your first payment on account
• 31 July: second payment on account

How much to set aside for tax

There's no official figure, but a lot of sole traders move 20% to 30% of every payment into a separate savings account as a habit. Treat it as a starting point, not a rule. In the example above, the tax came to about 15% of profit, but in the first year you'd also need the first payment on account, so keeping more aside made the January bill manageable.

If your profits are well into the higher rate band, the right percentage will be higher. Run your own numbers once a quarter and adjust. Our side hustle tax calculator gives a quick estimate if you also have a salary, and the day rate calculator helps you check your prices actually cover the tax.

Keeping records and when to get an accountant

Keep a record of every sale and every expense, with receipts and invoices, and keep them for at least five years after the 31 January deadline for that year. A separate business bank account and simple bookkeeping software make this much easier. Digital records will soon be required anyway: Making Tax Digital for Income Tax applies to qualifying income over £30,000 from April 2027 and over £20,000 from April 2028. Our guide to Making Tax Digital for sole traders has the details.

Plenty of people with simple businesses do their own return. An accountant earns their fee when you have several income sources, a lot of equipment or mileage, a property or overseas income, or when you're weighing up whether to become a limited company. If you haven't registered yet, start with how to register as self-employed.