How self-employed tax is worked out
As a sole trader you pay income tax and National Insurance on your profit, not your turnover. Profit is your business income for the tax year less allowable expenses, or less the £1,000 trading allowance if you choose that instead. The tax is not deducted as you go: you report the profit on a Self Assessment return and pay the bill, usually in advance instalments once you are established. The figures below are for the 2026/27 tax year, 6 April 2026 to 5 April 2027.
Income tax on profits
Profits are added to any other income, such as a salary, and taxed through the normal bands. Most people get a £12,570 personal allowance, which falls by £1 for every £2 of income above £100,000. In England, Wales and Northern Ireland the next £37,700 is taxed at 20%, income up to £125,140 at 40% and anything above at 45%. Scottish taxpayers pay 19%, 20%, 21%, 42%, 45% and 48% on profits and earnings instead.
If you also have a job, your salary uses up the personal allowance and the lower bands first, so your profits are taxed at your top rate. The calculator assumes PAYE takes the right tax on your salary and shows only the extra due on your profits.
National Insurance for the self-employed
- Class 4. 6% on profits between £12,570 and £50,270, and 2% above that. It is collected through Self Assessment with your income tax;
- Class 2. If your profits are £7,105 or more, Class 2 is treated as paid: you pay nothing and the year counts towards your State Pension. Below £7,105 you do not have to pay, but you can choose voluntary contributions at £3.65 a week to fill the gap in your record.
Expenses or the trading allowance
You can deduct the actual costs of running your business, or instead claim a flat £1,000 trading allowance. You cannot do both. If your gross trading income is £1,000 or less, the allowance covers all of it and you may not need to tell HMRC. The allowance cannot be used for income from a partnership, or from your employer or a company you or someone connected to you controls. The Budget on 28 October 2026 announced that it will rise to £3,000 from 6 April 2027.
Worked example
A sole trader in England has turnover of £45,000 and expenses of £8,000, with no other income:
| Amount | |
|---|---|
| Profit | £37,000.00 |
| Income tax: 20% of £24,430 | £4,886.00 |
| Class 4 NI: 6% of £24,430 | £1,465.80 |
| Class 2 | Treated as paid |
| Self Assessment bill | £6,351.80 |
That is about 17% of profit, or £529 a month to set aside.
Payments on account
Once your Self Assessment bill is £1,000 or more, HMRC normally asks for two payments on account towards the following year, each half of the current bill, due on 31 January and 31 July. They include Class 4, but student loan repayments and capital gains tax are paid with the balancing payment instead. You do not have to make them if more than 80% of the tax you owed was collected at source, for example through PAYE on a salary.
The first year is the one that catches people out. In the example above, if 2026/27 is the first year, the amount due by 31 January 2028 is the full £6,351.80 plus a first payment on account of £3,175.90 towards 2027/28, a total of £9,527.70. A second £3,175.90 follows on 31 July 2028. If your profits fall, you can ask HMRC to reduce your payments on account, but you will be charged interest if you reduce them too far. The Budget also announced that from April 2029 payments on account will move to smaller, more regular instalments.
What this calculator does not cover
- Partnerships and limited companies. Partners are taxed on their profit share, and company owners pay corporation tax and tax on salary and dividends;
- Losses and capital allowances. Enter profit after capital allowances; loss relief is not modelled;
- Other income. Savings, dividends, rental profit and pensions are taxed alongside your profits but are not included;
- Student loans and pension contributions. Student loan repayments are added to your Self Assessment bill, and personal pension contributions can extend your basic rate band;
- State Pension age. You stop paying Class 4 from the start of the tax year after you reach State Pension age.
Getting it right
Claiming every allowable expense keeps your bill down, and planning for the January and July payment dates keeps it from becoming a cash-flow problem. Our accountants for sole traders prepare accounts and returns, and our Self Assessment service can check your payments on account. For National Insurance on its own, see our National Insurance calculator.