How self-employed income tax works in the UK

When you're self-employed in the UK, you pay Income Tax and National Insurance on your profits, not your total income. Here's a plain English breakdown of how it works for the 2025/26 tax year.

1. Profit vs Turnover

The most important rule of self-employed tax is that you are taxed on your profit, not your turnover.

• Turnover (or Gross Income): All the money that comes into your business from clients.
• Allowable Expenses: The costs of running your business (software, travel, equipment, etc).
• Profit: Turnover minus Allowable Expenses. This is the figure HMRC cares about.

2. The Personal Allowance

Every individual in the UK gets a "Personal Allowance". For the 2025/26 tax year, this is £12,570. This means you can earn up to £12,570 in profit before you pay any Income Tax at all.

Note: If your total income goes over £100,000, your Personal Allowance starts to decrease, dropping by £1 for every £2 you earn over £100k.

3. Income Tax Bands

Once your profit goes above the Personal Allowance, you pay tax in bands:

• Basic Rate (20%): Paid on profit between £12,571 and £50,270.
• Higher Rate (40%): Paid on profit between £50,271 and £125,140.
• Additional Rate (45%): Paid on profit above £125,140.

4. National Insurance (NI)

As a sole trader, you are also liable for National Insurance. Historically, there were two types (Class 2 and Class 4), but the rules have changed recently.

• Class 2 NI: This used to be a flat weekly rate. From April 2024, it has been effectively abolished as a mandatory charge. If your profits are above £6,725, you are treated as having paid it to protect your State Pension record, but no money actually leaves your bank account. You can still pay it voluntarily if your profits are very low.
• Class 4 NI: This is a percentage of your profits. You pay 6% on profits between £12,570 and £50,270, and 2% on profits above £50,270.

5. How to pay it

Unlike an employee whose tax is taken via PAYE before they get paid, as a sole trader you receive your gross money and must calculate and pay your own tax. You do this by submitting a Self Assessment tax return each year.

You must submit your online return and pay your tax bill by 31 January following the end of the tax year.