A Beginner's Guide to Self-Employed Tax
2 min read · Reviewed 14 August 2026
Going self-employed means becoming responsible for your own tax, which can feel daunting at first. This guide breaks down what a sole trader pays, when, and how to stay on top of it.
Tax is charged on profit, not turnover
The first thing to understand is that as a sole trader you pay tax on your profit, not your total sales. Profit is your income minus your allowable business expenses, the legitimate costs of running your business, such as stock, tools, travel and a share of home working costs.
Keeping good records of both income and expenses is therefore essential, because every valid expense reduces the profit you are taxed on. Many new sole traders pay more than they need to simply by failing to track deductible costs.
Income Tax and Class 4 National Insurance
Your profit is taxed using the same Income Tax bands and Personal Allowance as employees: nothing on the first £12,570, then 20%, 40% and 45%. On top of that you pay Class 4 National Insurance, charged at 6% on profits between £12,570 and £50,270 and 2% above, for 2026/27.
The old flat-rate Class 2 National Insurance is no longer charged for most people, though you can pay it voluntarily to protect your entitlement to the State Pension if your profits are low.
Self Assessment and payments on account
The self-employed report their income and pay their tax through Self Assessment, filing a tax return after the end of each tax year. The online filing and payment deadline is normally 31 January following the tax year.
A common surprise for first-timers is "payments on account": advance payments towards next year's bill, usually due in January and July, each worth half of your previous year's tax. In your first year this can mean paying around 150% of your bill at once, so it is wise to plan for it.
How much should you set aside?
Because tax is not deducted at source as it is for employees, you need to set money aside yourself. A sensible rule of thumb is to save around 25% to 30% of your profit for tax and National Insurance, and more if you are a higher-rate taxpayer.
Opening a separate savings account for tax, and moving a percentage of every payment into it, is one of the simplest habits that keeps self-employed people out of trouble at deadline time. Our self-employed tax calculator gives you the figure to plan around.
When VAT comes into play
Separate from Income Tax, you must register for VAT once your rolling 12-month taxable turnover exceeds £90,000. Registration means charging VAT on your sales but also lets you reclaim VAT on business purchases. Some businesses register voluntarily below the threshold to reclaim VAT or appear more established.
If your income is growing, keep an eye on the rolling total so you register at the right time. Our VAT registration checker tells you how much headroom you have before you reach the threshold.
This guide is general information, not financial, tax or legal advice. Figures are estimates and can change. Always check GOV.UK or a qualified professional for your own situation.