A complete plain English guide to tax for sole traders in 2026/27, covering income tax, National Insurance, the trading allowance, expenses and deadlines.
Going self employed is one of the most rewarding moves you can make, but the tax side can feel like a maze at first. The good news is that the basics are simple once they are explained properly. This complete guide covers how tax works when you are self employed in the 2026/27 tax year, from income tax and National Insurance to expenses, deadlines and the records you need to keep.
When you work for yourself as a sole trader, you pay tax on your profit, not on everything you bring in. Your profit is simply your income less your allowable business expenses. You report that profit to HMRC once a year through a Self Assessment tax return, and HMRC works out the income tax and National Insurance due. Unlike an employee, no tax is taken before you are paid, so you are responsible for setting money aside and paying it yourself.
If your self employed income is small, the trading allowance can keep it tax free. You can earn up to £1,000 a year from self employment without paying tax, or even needing to tell HMRC, which is ideal for a small side income. Once you go over £1,000 you need to register for Self Assessment, and you can then choose either to deduct your actual expenses or to claim the £1,000 allowance instead, whichever leaves you better off.
Your self employed profit is added to any other income you have and taxed at the normal income tax rates. For 2026/27 the first £12,570 is covered by your personal allowance and is tax free. Profit above that is taxed at 20% up to £50,270, then 40% up to £125,140, and 45% above that. Only the profit that falls in each band is taxed at that band's rate.
On top of income tax you pay National Insurance on your profits. Class 4 National Insurance is charged at 6% on profits between £12,570 and £50,270, and 2% on anything above £50,270. Class 2 National Insurance, which protects your State Pension record, is no longer compulsory once your profits are above £7,105, and below that level you can choose to pay it voluntarily at £3.65 a week to keep your record complete.
You pay your tax and National Insurance through Self Assessment. The return for the 2025/26 tax year, and any tax due, must be filed and paid online by 31 January 2027. If your bill is over £1,000 you will usually also make payments on account, which are advance payments towards the next year due on 31 January and 31 July. Setting aside a portion of every payment you receive makes these far easier to manage.
Claiming every expense you are entitled to is the simplest way to keep your tax bill down, because you only pay tax on profit. Allowable costs include stock and materials, tools and equipment, business travel, a share of your phone and home costs, accountancy fees, insurance and marketing. Keeping receipts and good records through the year makes this straightforward and means you never miss a deduction.
From 6 April 2026, the first wave of self employed people and landlords with qualifying income over £50,000 must follow Making Tax Digital for Income Tax, keeping digital records and sending HMRC quarterly updates. The threshold falls in later years, so most sole traders will be brought in over time. Moving to good cloud bookkeeping software now makes that change painless rather than stressful.
You pay income tax on your profit at 20%, 40% or 45% depending on your total income, plus Class 4 National Insurance at 6% and 2%. Your first £12,570 is usually tax free.
No. The trading allowance means you can earn up to £1,000 from self employment without registering or paying tax. Above that you must register for Self Assessment.
Through Self Assessment, with the return and payment due by 31 January, plus payments on account on 31 January and 31 July if your bill is over £1,000.
Class 4 at 6% on profits between £12,570 and £50,270 and 2% above, and Class 2 voluntarily below £7,105 of profit to protect your State Pension.
As a sole trader you are taxed on your profit, which is your business income minus your allowable expenses, not on the money you take out for yourself. That profit is added to any other income you have and taxed at the normal Income Tax rates of 20, 40 or 45 per cent, after your personal allowance. On top of Income Tax you pay Class 4 National Insurance on your profits, currently 6 per cent between the lower and upper limits and 2 per cent above. So two people with the same turnover can owe very different tax depending on their expenses and their other income.
Suppose you are a sole trader with 45,000 pounds of income and 9,000 pounds of allowable expenses, giving a profit of 36,000 pounds, and no other income. Your personal allowance of 12,570 pounds is tax free. The remaining 23,430 pounds is taxed at 20 per cent, which is 4,686 pounds of Income Tax. You then pay Class 4 National Insurance at 6 per cent on the profit above the lower limit, which adds roughly another 1,400 pounds. Your total bill is around 6,100 pounds, which you need to plan for out of your profit through the year.
If you start working for yourself you must tell HMRC and register for self assessment. The deadline is 5 October following the end of the tax year in which you started, and missing it can lead to penalties. Registering gives you a unique taxpayer reference and sets you up to file your return each year. It is a simple step, but an important one, and far better done early than left until the January rush.
The self assessment return and any tax for a year are due by 31 January after the year ends. If your bill is over 1,000 pounds you will usually also make payments on account, which are advance payments towards the next year, due on 31 January and 31 July. These catch many people out in their first full year, because the January payment can be one and a half times the actual bill.
Every pound of genuine business expense reduces your taxable profit, so claiming properly is one of the simplest ways to cut your bill. Allowable costs include stock and materials, travel, a share of your home if you work from there, equipment, insurance, marketing and professional fees. You can read the detail in our guide to allowable expenses for the self employed. The golden rule is that a cost must be wholly and exclusively for the business to be claimed.
Good records make everything easier, and from April 2026 they became a legal requirement for many. Making Tax Digital for Income Tax now applies to sole traders with income over 50,000 pounds, who must keep digital records and send HMRC quarterly updates, with the threshold falling to 30,000 pounds and then 20,000 pounds in later years. Even if you are below the threshold, keeping records in simple software or a tidy spreadsheet as you go saves hours and means you never miss an expense.
Many self employed people wonder whether to form a limited company. As a sole trader the setup is simple and your profit is taxed directly on you. A company can be more tax efficient once profits are larger and you are leaving money in the business, but it brings more admin, more filing and more responsibility. There is no single right answer, and the best choice depends on your profit level, your plans and how much you need to draw.
The biggest practical mistake we see is spending everything that comes in and then being unable to pay the January bill. A simple habit fixes it. Set aside a portion of every payment you receive, often a quarter to a third depending on your profit, in a separate account, and the tax bill becomes something you have already saved for.
Not every year is profitable, especially at the start, and a loss is not wasted. A trading loss can often be set against your other income in the same or a previous year to get a refund, or carried forward against future profits of the same business. The relief can be valuable, particularly in your early years, so a loss should always be reported rather than ignored.
The problems we see most often are registering late, missing allowable expenses and so overpaying, forgetting about payments on account, and leaving the return until the last minute. None are difficult to avoid with a little organisation, and the savings from claiming everything you are entitled to usually more than cover the cost of getting help.
We are friendly, fully online and work with clients right across the UK. Book a free, no obligation call back and we will explain exactly what applies to you, in plain English.