Self-Employed Tax in United Kingdom

Sole traders and freelancers in the United Kingdom are taxed on business profits under the Income Tax (Trading and Other Income) Act 2005. Tax is calculated on net profits -- income after deducting allowable business expenses -- and reported each year through HMRC's Self Assessment system. This page summarises the key rules for 2025/26 (6 April 2025 to 5 April 2026) for residents of England, Wales, and Northern Ireland. Scottish rates differ across six bands; see HMRC's Scottish income tax page for the current Scottish Rate of Income Tax figures. For the full picture of UK taxes affecting businesses and individuals, see the United Kingdom country overview.

What income tax does a sole trader pay on profits?

HMRC applies income tax to self-employment profits after deducting the personal allowance. For 2025/26 the personal allowance is GBP 12,570 -- this is the amount of profit below which no income tax is due. Above that level, the rest-of-UK (England, Wales, Northern Ireland) rates are as follows:

The personal allowance tapers by GBP 1 for every GBP 2 of adjusted net income above GBP 100,000, reaching zero at GBP 125,140. Both the personal allowance and the higher-rate threshold have been frozen at these levels since 2021/22, a policy extended through 2027/28. As nominal profits rise with inflation, more sole traders cross band boundaries even without a statutory rate change. Source: HMRC, Income Tax rates and Personal Allowances [gov.uk/income-tax-rates].

How does Class 4 National Insurance work for self-employed people?

Sole traders pay two classes of National Insurance. Class 4 is the main contribution and is charged on annual profits above the Lower Profits Limit. For 2025/26:

• Below GBP 12,570 (Lower Profits Limit): no Class 4 due.
• GBP 12,570 to GBP 50,270 (Upper Profits Limit): 6% on profits in this range.
• Above GBP 50,270: 2% on profits above this level.

Class 4 is paid alongside income tax through Self Assessment, not through a separate payment channel. The 6% main rate was reduced from 9% in April 2023 and again from 8% in April 2024; the 2025/26 figure of 6% is confirmed in HMRC's published rates and allowances [gov.uk/government/publications/rates-and-allowances-national-insurance-contributions].

Class 2 National Insurance, formerly a flat weekly charge of GBP 3.45, changed significantly from April 2024. Sole traders with profits at or above the Small Profits Threshold (GBP 6,845 for 2025/26) now receive National Insurance credits toward the state pension and contributory benefits automatically, without paying Class 2. Those with profits below GBP 6,845 can still make voluntary Class 2 contributions -- GBP 3.50 per week in 2025/26 -- to preserve entitlement to the state pension and other contributory benefits. This matters for sole traders in low-profit years or winding down a business.

What is the GBP 1,000 trading allowance?

The trading allowance under Section 783A ITTOIA 2005 provides GBP 1,000 of tax-free gross trading income each year. If total trading income is GBP 1,000 or less, no Self Assessment filing is required for that income, and no tax or National Insurance is due on it. Where trading income exceeds GBP 1,000, a sole trader can elect to deduct the GBP 1,000 allowance instead of claiming actual business expenses -- useful when actual costs are minimal or difficult to document.

The trading allowance cannot be combined with actual expenses: it is an either/or election. It also does not apply to income from a partnership. Separate from the trading allowance, a property allowance of GBP 1,000 exists for rental income. Source: HMRC, Tax-free allowances on property and trading income [gov.uk/guidance/tax-free-allowances-on-property-and-trading-income].

How does Self Assessment work, including payments on account?

Sole traders register with HMRC by 5 October of the tax year following the year in which trading begins. A trader who started in 2025/26 registers by 5 October 2026 to avoid a potential late-registration penalty. Registration produces a Unique Taxpayer Reference (UTR) used for all subsequent filings.

The annual Self Assessment return covers the period 6 April to 5 April. The SA100 main return plus the SA103S (short, for turnover under GBP 85,000) or SA103F (full, for larger turnovers or more complex deductions) must be filed by 31 January following the tax year end for online submissions, or by 31 October for paper returns. Late online filing carries an immediate GBP 100 penalty, rising with time.

Payments on account are advance payments toward the following year's tax bill. They apply when the previous year's Self Assessment liability (income tax plus Class 4 NI) exceeded GBP 1,000 and less than 80% of that liability was collected at source. Each payment on account equals half of the previous year's liability. Two instalments are due: the first on 31 January (alongside the balancing payment for the year just ended) and the second on 31 July. Where a sole trader expects profits to fall, a claim to reduce payments on account can be submitted online via the HMRC Government Gateway or on form SA303. Interest accrues if actual liability proves higher than the reduced amount claimed. Source: HMRC, Understand your Self Assessment bill -- Payments on account [gov.uk/understand-self-assessment-bill/payments-on-account].

What is Making Tax Digital for Income Tax and when does it apply?

Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) replaces the annual Self Assessment return with quarterly digital submissions, an End of Period Statement per business, and a Final Declaration. HMRC requires use of compatible software to maintain digital records and submit quarterly updates.

The mandatory rollout proceeds in phases based on qualifying gross income from self-employment and property combined:

• From 6 April 2026: sole traders and landlords with qualifying income above GBP 50,000 in 2024/25 must comply.
• From 6 April 2027: the threshold drops to GBP 30,000 (based on 2025/26 income).
• From 6 April 2028: a further drop to GBP 20,000 is confirmed by HMRC.

Quarterly updates summarise income and expenses for each quarter; they do not need to be a full set of accounts. The End of Period Statement finalises figures for each source of income, and the Final Declaration (replacing the SA100) confirms the complete picture by 31 January. Recognised software includes products from Xero, QuickBooks, Sage, FreeAgent, and others listed by HMRC. Spreadsheets are permitted only with approved bridging software. Source: HMRC, Find out if and when you use Making Tax Digital for Income Tax [gov.uk/guidance/check-if-youre-eligible-for-making-tax-digital-for-income-tax].

What expenses can a sole trader deduct, and what are simplified expenses?

Allowable expenses follow the 'wholly and exclusively for the purposes of the trade' test under Section 34 ITTOIA 2005. Common deductible categories include: cost of sales and materials, business premises costs (rent, rates, utilities), staff wages and subcontractor fees, marketing and website costs, professional fees (accountants, business insurance), business travel, and training that maintains existing skills. Capital purchases of plant and machinery qualify for the Annual Investment Allowance (100% first-year relief up to GBP 1 million per year).

Simplified expenses allow sole traders to use HMRC flat rates instead of calculating actual costs for certain categories:

• Vehicles: 45p per mile for the first 10,000 business miles in 2025/26 (this rises to 55p from 6 April 2026); 25p per mile above 10,000 miles. Motorcycle rate: 24p per mile.
• Working from home: a monthly flat rate based on hours worked from home -- GBP 10 per month for 25 to 50 hours, GBP 18 for 51 to 100 hours, GBP 26 for 101 or more hours. Only available where business use exceeds 25 hours per month. Does not cover telephone or internet costs, which are claimed separately by apportioning actual bills.

Once a flat rate is chosen for a vehicle, it applies for the life of that vehicle. The two methods cannot be mixed. Source: HMRC, Simplified expenses if you are self-employed [gov.uk/simpler-income-tax-simplified-expenses].

For complex situations -- cross-border income, IR35 assessments, partnership structures, or multiple income streams -- the rules interact in ways that a qualified accountant or tax professional is best placed to assess.