If you’re self-employed, one of the most common questions is: how much tax do I actually pay?
The answer depends on your total profits for the year, but once you understand the structure, it’s straightforward. This guide covers Income Tax, National Insurance and the key allowances for 2025/26.
The Sole Trader Tax Rates for 2025/26
As a sole trader, you pay two types of tax on your profits:
- Income Tax — charged on your taxable profits above the Personal Allowance
- National Insurance (NI) — Class 2 (flat rate) and Class 4 (percentage of profits)
Income Tax Bands (England, Wales and Northern Ireland)
| Band | Taxable Income | Rate |
|---|---|---|
| Personal Allowance | Up to £12,570 | 0% |
| Basic Rate | £12,571 – £50,270 | 20% |
| Higher Rate | £50,271 – £125,140 | 40% |
| Additional Rate | Over £125,140 | 45% |
National Insurance (2025/26)
| Class | When it applies | Rate |
|---|---|---|
| Class 2 | Profits above £12,570 | £3.45/week (flat rate) |
| Class 4 | Profits £12,571 – £50,270 | 9% |
| Class 4 (upper) | Profits above £50,270 | 2% |
How Much Tax Will I Pay? Real Examples
Here’s what a sole trader actually pays at different profit levels in 2025/26, assuming no other income and using the standard Personal Allowance.
| Annual Profit | Income Tax | NI (Class 2+4) | Total Tax | Effective Rate |
|---|---|---|---|---|
| £15,000 | £486 | £409 | £895 | 6% |
| £25,000 | £2,486 | £1,309 | £3,795 | 15.2% |
| £40,000 | £5,486 | £2,479 | £7,965 | 19.9% |
| £60,000 | £13,432 | £3,209 | £16,641 | 27.7% |
| £80,000 | £21,432 | £3,609 | £25,041 | 31.3% |
Note: These are estimates based on standard Personal Allowance with no other adjustments. Your actual bill may differ based on allowable expenses, pension contributions and other factors.
What Reduces Your Tax Bill?
You are taxed on your profits, not your turnover. This is the most important distinction for self-employed people. Allowable business expenses reduce your profit — and therefore your tax bill.
Common Allowable Expenses for Sole Traders
- Office costs — stationery, software subscriptions, phone bills
- Travel — mileage at HMRC approved rates (45p/mile for first 10,000 miles), train and bus fares
- Equipment — laptops, tools, cameras and other business kit
- Marketing — website, advertising, business cards
- Professional fees — accountancy fees, legal advice
- Home office costs — a proportion of your bills if you work from home
- Pension contributions — contributions to a personal pension reduce your taxable income
- Training — courses directly related to your current trade
For example, if you earn £40,000 but have £8,000 in allowable expenses, you only pay tax on £32,000 — saving approximately £1,600 in tax.
When Do You Pay?
As a sole trader, you pay tax through Self Assessment. Key dates for 2025/26:
- 5 April 2026 — End of the 2025/26 tax year
- 31 July 2025 — Second payment on account (for 2024/25)
- 31 January 2026 — Self Assessment deadline for 2024/25 returns + first payment on account for 2025/26
- 31 July 2026 — Second payment on account for 2025/26
Payments on account: If your tax bill exceeds £1,000 and less than 80% was deducted at source, HMRC requires you to pay in advance — twice a year. This catches many new sole traders off guard in their second year.
Do I Need to Register for VAT?
If your annual turnover exceeds the VAT registration threshold (£90,000 from April 2024), you must register for VAT with HMRC. This is separate from Income Tax and NI, and adds another compliance obligation.
Registering below the threshold is optional (known as voluntary registration) and can be beneficial if your customers are businesses that can reclaim VAT.
Sole Trader vs Limited Company — Is There a Tax Advantage?
Once profits exceed approximately £30,000–£35,000, operating through a limited company often becomes more tax-efficient. A limited company pays Corporation Tax at 19%–25% on profits, and the director can extract income as a combination of salary and dividends — a much lower overall tax rate than sole trader Income Tax plus NI.
However, limited companies come with more administration: annual accounts, Corporation Tax returns, Companies House filings and payroll. Whether the tax saving is worth the extra compliance depends on your circumstances.
Not sure how much tax you’ll owe this year?
Get a free 30-minute consultation with one of our accountants. We’ll review your income, expenses and tax position — no obligation.
Get a Free Quote Book a ConsultationMaking Tax Digital for Sole Traders
From April 2026, sole traders with profits above £50,000 will be required to use Making Tax Digital (MTD) for Income Tax — filing quarterly updates to HMRC using approved software, rather than an annual Self Assessment return.
Sole traders with profits above £30,000 follow in April 2027. If this applies to you, now is the time to get compatible accounting software set up.
Summary
- Sole traders pay Income Tax on profits above £12,570, at 20%, 40% or 45%
- You also pay Class 2 NI (flat rate) and Class 4 NI (9% on profits £12,571–£50,270)
- Tax is paid via Self Assessment — key deadline is 31 January each year
- Allowable expenses reduce your profit and therefore your tax bill
- If profits exceed ~£35,000, a limited company structure may be more tax-efficient
- MTD for Income Tax applies from April 2026 for profits above £50,000
If you’d like a personalised calculation based on your actual income and expenses, get in touch — we’re happy to run the numbers for you.
