Self-employed tax explained (2026/27)

What you pay tax on: profit, not turnover

Tax is charged on your trading profit: your sales (turnover) minus allowable business expenses. Allowable expenses must be incurred wholly and exclusively for the business, for example stock, materials, business insurance, accountancy fees, phone and software costs, and the business share of vehicle or home costs. Personal spending, client entertaining and the capital cost of equipment (which is claimed through capital allowances instead) are not ordinary expenses.

Since basis period reform, profits are taxed on a tax-year basis (6 April to 5 April). If your accounts run to a different date, you apportion profits from two accounting periods into the tax year.

Income Tax and National Insurance rates for 2026/27

The figures below apply in England, Wales and Northern Ireland. Scottish taxpayers use Scottish Income Tax bands, but National Insurance is UK-wide. The personal allowance is £12,570 and is reduced by £1 for every £2 of income over £100,000.

Class 2 National Insurance is now voluntary

Since 6 April 2024 self-employed people no longer have to pay Class 2 NI. If your profits are at or above the small profits threshold (£7,105 for 2026/27), you are treated as having paid it and still build up State Pension and benefit entitlement at no cost.

If your profits are below £7,105, you can choose to pay voluntary Class 2 at £3.65 a week (£189.80 for a full year) to protect your National Insurance record. That is far cheaper than voluntary Class 3 at £18.40 a week, so it is usually worth doing if you have gaps. You pay it through your Self Assessment return.

Worked example: £45,000 profit

Priya is a sole trader in England with £45,000 profit in 2026/27 and no other income.

• Taxable income: £45,000 - £12,570 = £32,430
• Income Tax: £32,430 x 20% = £6,486
• Class 4 NI: £32,430 x 6% = £1,945.80
• Total bill: £8,431.80 (about 18.7% of profit), leaving £36,568.20

Payments on account

If your last Self Assessment bill was more than £1,000, and less than 80% of your tax was collected at source, HMRC asks you to pay in advance towards next year. Each payment on account is half of the previous year's Income Tax and Class 4 bill, due on 31 January (in the tax year) and 31 July (after it). Any balance is paid on 31 January following the end of the tax year.

This catches out people in their first year. If Priya's first trading year is 2026/27, on 31 January 2028 she pays the full £8,431.80 for 2026/27 plus a first payment on account of £4,215.90 for 2027/28, a total of £12,647.70. If you expect profits to fall, you can apply to reduce payments on account, but interest is charged if you reduce them too far.

The £1,000 trading allowance

If your gross trading income (before expenses) is £1,000 or less in a tax year, it is tax-free and you do not need to tell HMRC. Above £1,000, you can deduct the £1,000 allowance instead of your actual expenses. That helps side hustles with very low costs. If your real expenses are higher than £1,000, claim expenses instead. You cannot use the allowance against income from a partnership or from your own company.

Making Tax Digital for Income Tax

Making Tax Digital (MTD) for Income Tax started on 6 April 2026. It applies to sole traders and landlords whose qualifying income (gross self-employment plus property income, before expenses) is over the threshold on an earlier return. You must keep digital records in compatible software, send quarterly updates and submit your tax return through that software by 31 January.

Quarterly updates for a standard tax year are due by 7 August, 7 November, 7 February and 7 May. HMRC has confirmed there are no penalties for missed quarterly update deadlines in 2026/27, although the updates still need to be sent before you file the return.

Practical tips

• Set aside 20% to 30% of profit in a separate account; more if you are a higher-rate taxpayer or face your first payment on account.
• Register for Self Assessment by 5 October after the end of the tax year in which you started trading.
• Consider VAT registration when taxable turnover passes £90,000 in a rolling 12 months.
• Pension contributions reduce higher-rate tax and can restore a tapered personal allowance.