How self-employed tax works in the UK

As a self-employed person in the UK, you pay tax through Self Assessment rather than PAYE. You submit a tax return each year covering 6 April to 5 April, and your tax bill is calculated on your taxable profit — gross income minus allowable business expenses.

You pay two main charges: income tax (the same bands as employees) and National Insurance (Class 2 flat rate plus Class 4 on profits). Unlike employees, no tax is deducted at source — you must budget to pay your bill by 31 January each year.

2025/26 Self-Employed Tax Rates

Income tax: 0% up to £12,570 · 20% on £12,571–£50,270 · 40% on £50,271–£125,140 · 45% above £125,140
Class 4 NI: 9% on profits £12,570–£50,270 · 2% above £50,270
Class 2 NI: £3.45/week (£179.40/year) if profit exceeds £12,570

What are payments on account?

Payments on account are advance payments towards your next year’s tax bill. If your Self Assessment tax bill exceeds £1,000 and less than 80% of your tax was collected at source (via PAYE), HMRC requires you to make two payments on account:

  • 31 January — 50% of last year’s tax bill (paid at the same time as the balancing payment)
  • 31 July — the remaining 50%

This is one of the most confusing aspects of self-employment tax. In your first year, your January bill can be up to 150% of what you expect — the current year’s full bill plus 50% on account for the next year. Many first-time self-employed people are caught off guard by this.

Allowable expenses for the self-employed

You can deduct legitimate business expenses from your income before calculating tax. Common allowable expenses include:

  • Office costs — rent, bills, broadband if working from home (using simplified flat rates or actual costs)
  • Travel — mileage at 45p/mile (first 10,000 miles) then 25p/mile; public transport; parking
  • Equipment and tools — computers, phones, specialist tools
  • Professional fees — accountancy, insurance, subscriptions to professional bodies
  • Marketing — website costs, advertising
  • Stock and materials consumed in your trade

You cannot deduct personal expenses, client entertainment, or the cost of buying capital assets (though capital allowances may apply).

The £1,000 trading allowance

If your gross self-employment income is £1,000 or less, you don’t need to declare it or pay any tax — this is the trading allowance. If your income is above £1,000, you can choose to either deduct your actual expenses, or instead claim the £1,000 trading allowance in place of expenses (whichever gives the better result).

Frequently asked questions

When do I need to register as self-employed?
You must register with HMRC as self-employed by 5 October following the end of the tax year in which you started working for yourself. So if you started self-employment at any point during the 2025/26 tax year (6 April 2025 to 5 April 2026), you must register by 5 October 2026. Failure to register on time can result in a penalty. You register online at HMRC’s website by setting up a Government Gateway account and enrolling for Self Assessment.
Should I register for VAT?
You must register for VAT if your taxable turnover exceeds £90,000 in any rolling 12-month period (the 2025/26 threshold). You can also register voluntarily below this threshold — useful if you have significant VAT on purchases that you want to reclaim. For many small service businesses with low expenses, voluntary registration adds complexity without much benefit. For those close to the threshold, the Flat Rate Scheme can simplify VAT accounting. See our VAT calculator for a full breakdown.
Can I reduce payments on account?
Yes — if you believe your current year’s tax bill will be lower than last year’s (for example, because your income has dropped), you can apply to reduce your payments on account. You do this via your Self Assessment online account or by completing form SA303. If you reduce them too much, you’ll be charged interest on the underpayment. If you reduce them and your actual bill turns out higher, you’ll owe the difference in January with interest, so it’s worth being conservative with any reduction.
What records do I need to keep?
HMRC requires you to keep records for at least 5 years after the 31 January submission deadline. This means records for 2025/26 must be kept until at least 31 January 2032. Records include: sales invoices, receipts for all expenses, bank statements, mileage logs, and any contracts or agreements. Good record-keeping is essential both for accurate tax returns and in the event of an HMRC enquiry.
Is it better to be self-employed or set up a limited company?
At lower profit levels (typically below £30,000–£40,000), sole trader self-employment is usually simpler and not significantly less tax-efficient. Above this level, a limited company can save meaningful amounts through the salary-plus-dividends structure — taking a small salary (to preserve NI credits) and the rest as dividends, which attract no NI and lower income tax rates. However, a limited company has additional costs: accountancy fees, Companies House filings, and more complex administration. The crossover point depends on your circumstances — consult an accountant when considering incorporation.