Becoming self-employed in the UK means swapping PAYE for Self Assessment: you work out your own profit, file a tax return and pay HMRC directly. The good news is that self-employed NI is cheaper than an employee’s, and you can deduct business costs. This guide covers everything a sole trader or freelancer needs for the 2026/27 tax year.
Registering as self-employed
If your self-employed income is more than £1,000 in a tax year, you must register for Self Assessment by 5 October after that tax year ends. For income earned in 2026/27 the deadline is 5 October 2027. You’ll get a Unique Taxpayer Reference (UTR). Being employed and self-employed at the same time is fine. Your side income goes on the self-employment pages of your return.
Working out your profit
You pay tax on profit: income minus allowable expenses. Expenses must be “wholly and exclusively” for the business. Common examples:
- Equipment, tools, computers and software
- A proportion of household bills if you work from home (or HMRC’s flat-rate amounts)
- Business travel, mileage at HMRC rates, and vehicle costs
- Stock and materials, advertising, website and hosting
- Accountancy, insurance, bank charges and professional subscriptions
Most small businesses use cash basis accounting, which is now the default: you record income when you receive it and expenses when you pay them.
The £1,000 trading allowance
Instead of claiming actual expenses you can deduct a flat £1,000 trading allowance. It suits people with few costs, and if your gross trading income is £1,000 or less you don’t need to report it at all. You can’t claim both the allowance and expenses. Our calculator automatically uses whichever is larger.
Income Tax on profits
Profits are added to any other income and taxed at the normal rates: 20% basic, 40% higher and 45% additional above the £12,570 Personal Allowance (or the six Scottish bands). Employment income uses up your Personal Allowance and lower bands first, so side-business profit can be taxed at a higher rate than you expect.
Class 2 and Class 4 National Insurance
| Profits | National Insurance (2026/27) |
|---|---|
| Under £7,105 | Nothing to pay. Voluntary Class 2 at £3.65 a week protects your State Pension record |
| £7,105 – £12,570 | Nothing to pay, and Class 2 is treated as paid |
| £12,570 – £50,270 | Class 4 at 6% |
| Above £50,270 | Class 4 at 2% |
Class 4 at 6% is cheaper than the 8% employees pay, which is part of why self-employed take-home is higher for the same profit.
Worked example
A freelance copywriter invoices £61,000 and has £1,000 of expenses, a profit of £60,000:
| Amount | |
|---|---|
| Income (revenue) | £61,000 |
| Business expenses | £1,000 |
| Profit | £60,000 |
| Income Tax | £11,432 |
| Class 4 National Insurance | £2,457 |
| Take-home pay | £46,111 |
| Total tax | £13,889 |
| Set aside each month | £1,157 |
They should set aside about £1,157 a month. To take home the same as an employee they’d need a salary of about £61,300.
Self-employed vs employed take-home
| Profit / salary | Self-employed keeps | Employee keeps | Difference |
|---|---|---|---|
| £15,000 | £14,368 | £14,320 | +£49 |
| £25,000 | £21,768 | £21,520 | +£249 |
| £40,000 | £32,868 | £32,320 | +£549 |
| £60,000 | £46,111 | £45,357 | +£754 |
| £80,000 | £57,711 | £56,957 | +£754 |
| £120,000 | £76,911 | £76,157 | +£754 |
The self-employed keep more of the same figure, but have no sick pay, holiday pay, employer pension or redundancy rights. Price your work accordingly.
Self Assessment deadlines
| Date | What’s due |
|---|---|
| 5 October 2027 | Register for Self Assessment (if new) |
| 31 October 2027 | Paper return for 2026/27 |
| 31 January 2028 | Online return for 2026/27, balancing payment, and first payment on account for 2027/28 |
| 31 July 2028 | Second payment on account for 2027/28 |
Missing the filing deadline triggers an automatic £100 penalty, with more after three months. Making Tax Digital for Income Tax starts from April 2026 for sole traders with qualifying income over £50,000 (and £30,000 from April 2027). They must keep digital records and send quarterly updates using compatible software.
Payments on account
If your Self Assessment bill is more than £1,000 (and less than 80% of your tax was deducted at source), HMRC asks for payments on account: two advance payments towards next year’s bill, each equal to half of this year’s, due 31 January and 31 July. In your first year this can mean paying 150% of a year’s tax in one January. Saving monthly from day one avoids the shock. You can apply to reduce payments on account if your income is falling.
VAT
You must register for VAT if your taxable turnover goes over £90,000 in any rolling 12 months. You then charge 20% VAT, which you pass to HMRC minus the VAT you pay on business costs. Voluntary registration can make sense if your clients are VAT-registered businesses.
Pensions for the self-employed
No employer pays into a pension for you, so set one up yourself: a personal pension or SIPP. Contributions get tax relief at your highest rate (20% added automatically, more via your tax return). They also reduce your adjusted net income for the £100,000 trap and the Child Benefit charge.
Sole trader or limited company?
A limited company pays Corporation Tax (19% to 25%) on profits. You can then take a small salary plus dividends, which are taxed at lower rates and carry no NI. At higher profits this can save tax, but it brings more admin, accounts filing at Companies House, and less flexibility in taking money out. Since dividend allowances were cut and Corporation Tax rose, the advantage is smaller than it used to be. Speak to an accountant before switching.
Sole trader tax at every level
| Profit | Income Tax | Class 4 NI | Take-home | Save each month |
|---|---|---|---|---|
| £20,000 | £1,486 | £446 | £18,068 | £161 |
| £35,000 | £4,486 | £1,346 | £29,168 | £486 |
| £50,000 | £7,486 | £2,246 | £40,268 | £811 |
| £75,000 | £17,432 | £2,757 | £54,811 | £1,682 |
| £100,000 | £27,432 | £3,257 | £69,311 | £2,557 |
| £150,000 | £53,703 | £4,257 | £92,040 | £4,830 |
Making Tax Digital for Income Tax
From 6 April 2026, sole traders and landlords with qualifying income over £50,000 must keep digital records and send HMRC quarterly updates through compatible software, then a final declaration after the year ends. The threshold drops to £30,000 from April 2027. If you’re near these levels, choose MTD-compatible bookkeeping software now.
Record keeping
Keep records of all income and expenses (invoices, receipts, bank statements and mileage) for at least five years after the 31 January filing deadline. A dedicated business bank account makes this far easier, even though sole traders aren’t legally required to have one.
Your first-year checklist
- Register for Self Assessment and keep your UTR safe.
- Open a separate account and move 20–30% of each payment into tax savings.
- Decide between actual expenses and the £1,000 trading allowance.
- Choose your accounting basis (cash basis is the default for most).
- Diarise 31 January and 31 July, and remember payments on account in year two.
- Set up a personal pension and check whether VAT registration (voluntary or compulsory) applies.
Common mistakes
- Forgetting payments on account and facing 150% of a year’s tax in your first January.
- Claiming personal costs, or the full cost of mixed-use items, as business expenses.
- Not claiming use of home, mileage or phone costs at all.
- Missing the 5 October registration deadline, which can trigger penalties.
Sole trader vs limited company: an illustration
On £80,000 of profit as a sole trader you keep about £57,711. Through a limited company, profit is first taxed at Corporation Tax (19% on profits up to £50,000, rising on a sliding scale to 25% above £250,000), and you then draw a small salary plus dividends, taxed at 10.75%, 35.75% and 39.35% above the £500 dividend allowance. Whether that beats sole trading depends on how much you leave in the company. If you take everything out, the saving is often small, and accountancy and filing costs eat into it. Many accountants only recommend incorporating once profits are comfortably above what you need to live on.
Frequently asked questions
How much tax will I pay as a sole trader?
Income Tax at your usual rates plus Class 4 NI on profits. On £60,000 of profit in England it’s about £13,889 in total.
Can I be employed and self-employed?
Yes. You’ll pay PAYE on your salary and Self Assessment on your business profits.
How much should I save for tax when self-employed?
Roughly 20–30% of profit for most freelancers, or the exact monthly figure from the calculator.
Do I need an accountant?
Not legally. Many sole traders file their own return online. An accountant helps once you have VAT, employees or are considering a limited company.
