Self-Employed Tax Guide 2025-26: Income Tax, National Insurance, Payments on Account
Running your own business in the UK means taking personal responsibility for calculating and paying your tax. Unlike employees, who have tax deducted automatically through PAYE, self-employed people must file a Self Assessment tax return each year and pay Income Tax, Class 2 National Insurance, and Class 4 National Insurance directly to HMRC.
This guide covers every element of self-employed taxation for the 2025-26 tax year (6 April 2025 to 5 April 2026), with worked examples at realistic profit levels. All figures reflect current HMRC rates.
The three taxes you owe as a self-employed person
Self-employed individuals pay three separate charges:
- Income Tax on taxable profits (after deducting your Personal Allowance and allowable expenses).
- Class 2 National Insurance, a flat weekly charge of £3.50 (2025-26). This is payable if your profits exceed £12,570. Below that threshold, you can still pay voluntarily to protect your State Pension entitlement.
- Class 4 National Insurance at 6% on profits between £12,570 and £50,270, plus 2% on profits above £50,270.
Note the Class 4 rate of 6%. This dropped from 9% in previous years and is a significant reduction that many guides still get wrong. The current rate for 2025-26 is 6%, confirmed by HMRC.
Income Tax bands for the self-employed
Self-employed profits are taxed using the same Income Tax bands as employment income. For 2025-26 in England, Wales, and Northern Ireland:
| Band | Taxable Income | Rate |
|---|---|---|
| Personal Allowance | Up to £12,570 | 0% |
| Basic rate | £12,571 to £50,270 | 20% |
| Higher rate | £50,271 to £125,140 | 40% |
| Additional rate | Over £125,140 | 45% |
Scottish self-employed taxpayers use the Scottish Income Tax rates, which have six bands from 19% to 48%. See Scottish tax rates for a £50,000 income.
Worked example: £40,000 profit
A sole trader in England with £40,000 net profit for 2025-26 (after deducting allowable expenses) pays the following:
Income Tax:
- First £12,570: tax-free (Personal Allowance)
- £12,571 to £40,000 (£27,430) at 20% = £5,486
Class 2 NI: £3.50 x 52 weeks = £182
Class 4 NI:
- 6% on £12,570 to £40,000 (£27,430) = £1,645.80
Total tax bill: £5,486 + £182 + £1,645.80 = £7,313.80
Take-home: £40,000 - £7,313.80 = £32,686.20 per year, roughly £2,724 per month.
See the full self-employed breakdown for £40,000 profit.
Worked example: £75,000 profit
A self-employed consultant in England with £75,000 net profit:
Income Tax:
- £12,570 at 0% = £0
- £12,571 to £50,270 (£37,700) at 20% = £7,540
- £50,271 to £75,000 (£24,730) at 40% = £9,892
Total IT: £17,432
Class 2 NI: £182
Class 4 NI:
- 6% on £12,570 to £50,270 (£37,700) = £2,262
- 2% on £50,270 to £75,000 (£24,730) = £494.60
Total NI: £182 + £2,262 + £494.60 = £2,938.60
Total tax bill: £17,432 + £2,938.60 = £20,370.60
Take-home: £75,000 - £20,370.60 = £54,629.40 per year.
Full breakdown for £75,000 self-employed profit.
Allowable expenses: what you can deduct
Self-employed individuals can deduct business expenses from their revenue before calculating taxable profit. HMRC requires that expenses are incurred "wholly and exclusively" for business purposes. Common allowable expenses include:
- Office costs: stationery, phone bills, internet (business proportion), software subscriptions
- Travel: fuel, train tickets, parking (for business journeys, not commuting)
- Professional services: accountancy fees, legal costs, insurance premiums
- Stock and materials: goods purchased for resale, raw materials
- Working from home: you can claim a flat rate of £6/week (£312/year) without evidence, or calculate the actual proportion of household costs used for business
You cannot deduct personal expenses, clothing (unless it is a uniform or protective equipment), or fines and penalties. Keep records of all expenses for at least five years after the 31 January submission deadline.
The Trading Allowance
If your gross self-employment income is less than £1,000 in a tax year, you do not need to register with HMRC or file a return. This is the Trading Allowance. If your income exceeds £1,000, you can either deduct actual expenses or use the £1,000 allowance instead (but not both). The Trading Allowance is useful for people with small side incomes, such as occasional freelance work or selling handmade goods.
Self Assessment: key deadlines for 2025-26
The Self Assessment tax return for 2025-26 follows these deadlines:
| Deadline | What is due |
|---|---|
| 5 October 2026 | Register for Self Assessment if you have not already (new self-employed only) |
| 31 October 2026 | Paper tax return deadline (if filing by post) |
| 31 January 2027 | Online tax return deadline. Also the deadline for paying the balancing payment for 2025-26, plus the first Payment on Account for 2026-27. |
| 31 July 2027 | Second Payment on Account for 2026-27 |
Missing the 31 January deadline triggers an automatic £100 late filing penalty, even if you owe no tax. Interest accrues on late payments from the due date.
Payments on Account explained
If your Self Assessment tax bill exceeds £1,000 and less than 80% of your total tax is collected at source (through PAYE, for example), HMRC requires you to make Payments on Account. These are advance payments toward next year's tax bill, each equal to half of the current year's liability.
Example: your 2025-26 tax bill is £8,000. You pay £8,000 on 31 January 2027 (the balancing payment for 2025-26), plus £4,000 as the first Payment on Account for 2026-27. On 31 July 2027, you pay another £4,000 (second Payment on Account). When you file your 2026-27 return, the £8,000 in Payments on Account is credited against your actual liability, and you pay any balance (or receive a refund if you overpaid).
If your income drops from one year to the next, you can apply to reduce your Payments on Account through your HMRC online account. Be accurate with this estimate: if you reduce too far, interest charges apply on the underpayment.
Class 2 NI and your State Pension
Class 2 NI contributions count as qualifying years for the State Pension. You need 35 qualifying years for the full new State Pension (£230.25/week in 2025-26). Even if your profits are below £12,570 and Class 2 is not compulsory, paying it voluntarily at £3.50/week (£182/year) is one of the cheapest ways to build pension entitlement. Each qualifying year adds roughly £6.58/week to your State Pension, so a single year of voluntary Class 2 payments (£182) buys you roughly £342 per year of pension income for life. Check our State Pension calculator for more details.
Self-employed vs employed: a quick comparison
For the same gross income, a self-employed person typically pays less NI than an employee. An employee earning £40,000 pays 8% NI on £12,570 to £40,000 (£2,194.40), while a self-employed person with £40,000 profit pays 6% Class 4 NI (£1,645.80) plus £182 Class 2 (total: £1,827.80). The self-employed person saves about £366.60 in NI.
However, the self-employed person receives fewer benefits: no employer pension contributions, no employer NI credits, no statutory sick pay, and no paid holiday. The lower NI rate is partly intended to compensate for the lack of employer-funded benefits. Compare PAYE vs self-employed at £40,000.
Making Tax Digital for Income Tax
From April 2026, self-employed individuals and landlords with income over £50,000 will be required to keep digital records and submit quarterly updates to HMRC under Making Tax Digital for Income Tax Self Assessment (MTD for ITSA). Those with income over £30,000 will follow from April 2027. This replaces the annual Self Assessment return with more frequent reporting, though annual end-of-year adjustments will still be possible.
You will need compatible software (such as Xero, QuickBooks, or FreeAgent) to submit the quarterly updates. HMRC will not accept spreadsheets directly. If your self-employment income is below the relevant threshold, you can continue to file an annual return.
Frequently asked questions
Do I need to register as self-employed if I only earn a small amount?
If your gross self-employment income is under £1,000, the Trading Allowance means you do not need to register or file a return. Above £1,000, you must register with HMRC for Self Assessment by 5 October following the end of the tax year in which you started trading. Late registration does not carry a penalty itself, but late filing of the return does.
Can I be employed and self-employed at the same time?
Yes. Many people have a PAYE job and run a self-employed business on the side. Your employment income uses your Personal Allowance first (through your tax code), and your self-employment profits are added on top. You file a Self Assessment return that includes both sources. Class 2 and Class 4 NI apply to your self-employment profits regardless of the NI you already pay on your employment income. See our second job calculator for combined tax scenarios.
What happens if I make a loss?
Self-employment losses can be carried forward and set against future profits from the same trade. You can also set a loss against other income in the same tax year (for example, employment income), or carry it back to the previous year. Loss relief claims are made through your Self Assessment return. If your business consistently makes losses, HMRC may query whether you are trading with a reasonable expectation of profit.
Is the Class 4 NI rate really 6% now?
Yes. The Class 4 main rate for 2025-26 is 6% on profits between £12,570 and £50,270. This is down from 9% in 2023-24 and 8% in 2024-25. The upper rate remains 2% on profits above £50,270. Many online guides and older publications still show 9%. The current rate is confirmed on the GOV.UK National Insurance rates page.
Should I set up a limited company instead?
Operating through a limited company can be more tax-efficient at higher profit levels because you can pay yourself a combination of a small salary (to preserve NI credits) and dividends (taxed at lower rates than employment income). The crossover point depends on your specific circumstances, but typically becomes worth considering when profits consistently exceed £40,000-£50,000. A limited company brings additional responsibilities: corporation tax returns, annual accounts, Companies House filings, and potentially IR35 considerations if you provide services to clients. Check our IR35 calculator and umbrella vs limited company comparison for detailed scenarios.