Self-employed tax explained: what a sole trader pays

Going self-employed means the tax stops being taken off for you. Unless you work under CIS, where the contractor deducts it, nobody takes it at source, so it is on you to work out what you owe, set it aside, and pay it. This guide explains how that works for a sole trader, so the Self Assessment bill is a number you already knew, not a shock.

If you would rather just see a figure, the free self-employed tax calculator estimates your tax, National Insurance and take-home from two numbers.

What you actually pay tax on

The first thing to get straight: you are not taxed on everything you invoice. You are taxed on your profit, which is your income minus your allowable work expenses. Earn £40,000 and spend £10,000 running the business, and your profit is £30,000. That £30,000 is what the tax and National Insurance are worked out on.

On that profit you pay two things: Income Tax and Class 4 National Insurance. Both are settled once a year through your Self Assessment tax return.

If your income from self-employment and property, before expenses, is over a set limit, you also have to use Making Tax Digital for Income Tax. That means keeping digital records in compatible software and sending HMRC a summary every 3 months, called a quarterly update, as well as your tax return. The limit is £50,000 from 6 April 2026 (based on your 2024/25 income), £30,000 from 6 April 2027 (based on 2025/26) and £20,000 from 6 April 2028 (based on 2026/27).

The rates and bands

Here is how the tax on your profit stacks up, using the Income Tax bands for England, Wales and Northern Ireland and the Class 4 National Insurance rates for the 2025/26 and 2026/27 tax years, which are frozen at the same figures. Scotland sets its own Income Tax bands. The figures below assume your trade is your only income, a second job, a pension or other income shifts them.

• The first £12,570 of profit is covered by your Personal Allowance, so no Income Tax.
• Profit from £12,571 to £50,270 is taxed at 20 per cent.
• Profit from £50,271 to £125,140 is taxed at 40 per cent, and anything above at 45 per cent.
• If your profit is over £100,000, your Personal Allowance goes down by £1 for every £2 above £100,000, so it is zero at £125,140.
• On top of that, Class 4 National Insurance is 6 per cent on profit between £12,570 and £50,270, then 2 per cent above.

So a plumber with £30,000 of profit pays 20 per cent Income Tax and 6 per cent Class 4 on the slice above £12,570. It builds up gently, which is why the effective rate on your whole profit is lower than the headline band.

Why expenses cut your bill

This is the part that puts money back in your pocket. Every allowable work expense you claim lowers your taxable profit, which lowers both your Income Tax and your Class 4 National Insurance.

Tools and equipment, van running costs or mileage, materials, protective clothing, public liability insurance, your phone, use of home as an office: these are the everyday costs of a trade that reduce your profit. A bigger item like a van is usually claimed as an ordinary expense, because cash basis is the standard way for sole traders to record income and expenses. A car is the exception and goes through capital allowances, as does a van if you use traditional accounting. Shared costs like your phone are split for the business share. Not sure whether something counts? The free expense checker gives a plain answer with HMRC-based guidance. Keep every receipt through the year, because at tax time each one is worth a slice of tax saved.

How much to set aside

Because nothing is deducted for you, the danger is spending money that was really the taxman's. The fix is a habit: put a share of every payment aside the moment it lands, in a separate pot.

As a rough guide, on the England, Wales and Northern Ireland rates, the Income Tax and Class 4 National Insurance on £30,000 of profit is £4,531.80, about 15 per cent of it. On £50,270 it is about 20 per cent. Above £50,270 you are in the 40 per cent band and each extra £1 of profit costs 42p, so the share rises to about a quarter at £66,500 and about 31 per cent at £100,000. Any VAT you charge is separate, so set that aside too if you are registered. The calculator gives you a target figure so you are not guessing.

Payments on account, the first-year surprise

One thing catches almost every new sole trader out. If your Self Assessment bill is £1,000 or more, and you paid less than 80 per cent of your tax outside Self Assessment, HMRC usually asks you to pay next year's tax in advance, in two payments on account, each usually half of last year's bill. In your first year that can feel like paying one and a half times at once, because you settle the year just gone and pay half of the next in the same breath. It is not an extra tax, it is your future bill brought forward, but it needs budgeting for.

National Insurance for the self-employed

Two classes to know. Class 4 is the one you pay: 6 per cent then 2 per cent, as above, worked out on your profit through Self Assessment. Class 2 used to be a compulsory flat weekly charge. Since April 2024 it is no longer compulsory at any profit level: above the small profits threshold it is treated as paid, so you get the benefit toward your State Pension for nothing, and below it you can choose to pay it voluntarily to protect your record. The detail is on GOV.UK.

A note on using this guide

This guide explains the general position for a sole trader to help you understand how the tax works, not as tax advice for your situation. Your figure turns on your own income, expenses and circumstances, so if you are unsure, or the amounts are significant, check with HMRC or an accountant. Filing is through Self Assessment, with an online deadline of 31 January after the tax year ends.

When you are ready, the free self-employed tax calculator gives you an estimate. And if you keep your records in Trame, your expenses are already sorted into the right HMRC categories, so the profit your tax is worked out on is accurate, not a guess.

If you work under CIS, you may also be owed money back. See how to claim a CIS tax refund.

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