Self-Employed vs Employed: How Tax Differs

Q: Do the self-employed pay less National Insurance than employees?

Generally yes. A self-employed person pays Class 2 NI (£3.45/week if profit exceeds £12,570) and Class 4 NI (6% on profits between £12,570 and £50,270, 2% above). An employee pays Class 1 NI at 8% on earnings between £12,570 and £50,270, and 2% above. On a £40,000 profit, self-employed NI is approximately £1,836 versus £2,186 in Class 1, a saving of about £350.

Q: Can the self-employed deduct business expenses from their tax?

Yes. Self-employed individuals can deduct legitimate business expenses, such as office costs, tools, travel, professional subscriptions and marketing, from their gross income before calculating tax. Employees can only claim limited unreimbursed work expenses, and even then they must use HMRC's employment expense claim process. This expense flexibility is one of the main financial advantages of self-employment.

Q: How does a self-employed person pay their tax?

Self-employed people pay tax via Self Assessment. You complete an annual tax return by 31 January (online) for the previous tax year, and HMRC calculates the income tax and Class 4 NI owed. You also make "payments on account", advance payments of 50% of your prior year tax bill, in January and July each year. Employed workers have tax deducted automatically each pay period through PAYE, so they rarely need to file a return unless they have other income.

Income tax is the same either way, but National Insurance, payment timing and deductible expenses are very different. Here is what you actually need to know in 2025-26.

Income Tax: The Same for Both

The income tax bands are identical whether you are employed or self-employed. Both pay 0% on the first £12,570 (Personal Allowance), 20% on £12,571-£50,270, 40% on £50,271-£125,140, and 45% above that. There is no special "self-employment tax rate", the fundamental rate structure is the same.

What differs is how and when you pay. Employees pay through PAYE, tax is deducted by their employer before the salary lands in their bank account. Self-employed people pay via Self Assessment, filing a tax return each January for the previous tax year and making advance "payments on account" in January and July.

National Insurance: Where the Real Difference Lies

This is where self-employment creates a meaningful financial distinction. The NI class structures are fundamentally different.

Employed, Class 1 NI

Employees pay Class 1 NI at 8% on earnings between £12,570 and £50,270, and 2% on anything above that. Employers also pay an additional Class 1 employers' NI at 15% above £9,100 (from April 2025, increased from 13.8%). You never see this employer NI, but it represents a real cost to your employer on top of your salary.

Self-Employed, Class 2 and Class 4 NI

Self-employed individuals pay two types of NI. Class 2 is a flat-rate contribution of £3.45 per week (£179.40 per year) if your profits exceed £12,570. This is a small but important payment: it counts as a qualifying year for the State Pension and other contributory benefits. Class 4 is the earnings-related charge: 6% on profits between £12,570 and £50,270, and 2% above that.

The key difference: employed Class 1 NI is 8%, while self-employed Class 4 NI is 6%. On the same profit level, the self-employed pay 2 percentage points less in NI on each pound of earnings within the basic rate band.

Worked Example: £40,000 Profit (Self-Employed) vs £40,000 Salary (Employed)

Self-Employed at £40,000 Profit

Income tax: (£40,000 − £12,570) × 20% = £27,430 × 20% = £5,486
Class 2 NI: £3.45 × 52 weeks = £179.40
Class 4 NI: (£40,000 − £12,570) × 6% = £27,430 × 6% = £1,645.80
Total tax + NI: £5,486 + £179 + £1,646 = £7,311
Take-home (pre-expenses): £32,689

Employed at £40,000 Salary

Income tax: (£40,000 − £12,570) × 20% = £27,430 × 20% = £5,486
Class 1 NI: £27,430 × 8% = £2,194
Total tax + NI: £5,486 + £2,194 = £7,680
Take-home: £32,320

The self-employed person pays £369 less in NI on the same £40,000 income. However, that figure only tells part of the story, the employed worker receives statutory rights (sick pay, redundancy protection, employer pension contributions) that have real monetary value.

Comparison Table: Employed vs Self-Employed at Three Income Levels

Gross Income	Employed IT	Employed NI (Class 1)	Employed Take-Home	Self-Emp IT	Self-Emp NI (Cl2+Cl4)	Self-Emp Take-Home
£30,000	£3,486	£1,394	£25,120	£3,486	£179 + £1,046 = £1,225	£25,289
£40,000	£5,486	£2,194	£32,320	£5,486	£179 + £1,646 = £1,825	£32,689
£60,000	£11,432	£3,012	£45,556	£11,432	£179 + £2,326 = £2,505	£46,063

Business Expenses: A Major Advantage for the Self-Employed

The table above shows pre-expense profits. In reality, self-employed people can deduct legitimate business costs from their gross income before any tax is calculated. Qualifying expenses include:

Office supplies, phone and broadband (business proportion)
Travel and mileage (45p/mile for first 10,000 business miles)
Tools, equipment and specialist clothing
Professional subscriptions, training and memberships
Accounting fees and software
Advertising and marketing costs

If your actual expenses are £5,000 per year on a £40,000 gross income, your taxable profit falls to £35,000, reducing income tax by £1,000 and Class 4 NI by £300, a combined saving of £1,300. Employed workers receive minimal equivalent relief; the standard Employment Expenses deduction is capped at £2,500 and only covers specific HMRC-approved expenses.

What You Give Up as a Self-Employed Worker

The NI saving comes at a cost. Self-employed workers have no statutory employment rights: no employer pension contributions (the employer typically pays 3%+ on top of salary), no statutory sick pay from an employer, no paid holiday entitlement, no redundancy pay, and no unfair dismissal protection. These have real monetary value, an employer paying 3% pension contributions on a £40,000 salary adds £1,200 per year in benefits not visible on the NI comparison.

Self-employed workers also face income uncertainty, must cover their own professional indemnity and public liability insurance, and carry the administrative burden of Self Assessment, typically requiring either accountancy fees (£300-£1,000/year) or significant time investment.

Payments on Account: The Cash Flow Trap

New self-employed workers often encounter a cash flow shock in their second year. Once your self-assessment tax bill exceeds £1,000, HMRC requires you to make payments on account, two advance payments of 50% of the prior year's bill, due 31 January and 31 July. This means in January of your second trading year, you pay the prior year's tax bill plus 50% of the next year's bill simultaneously. Setting aside 25-30% of your gross monthly income into a separate account from day one avoids this problem.

Frequently Asked Questions

Do the self-employed pay less National Insurance than employees?

Generally yes. Class 4 NI for the self-employed is 6% (versus 8% Class 1 for employees) on earnings within the basic rate band. On a £40,000 income, the self-employed save approximately £350-£370 in NI compared to a PAYE employee on the same gross.

Can the self-employed deduct business expenses from their tax?

Yes. Self-employed individuals deduct legitimate business costs, office, travel, tools, professional fees, and marketing, before calculating taxable profit. This can significantly reduce both income tax and Class 4 NI. Employees cannot access equivalent relief except through a narrow set of HMRC-approved employment expenses.

How does a self-employed person pay their tax?

Via Self Assessment. You file an annual return by 31 January for the previous tax year, and pay any balance owed. Once your bill exceeds £1,000, HMRC also requires payments on account, advance payments of 50% of the prior year's bill in January and July. Keeping a cash reserve of 25-30% of income avoids payment shock.