As a sole trader, you pay Income Tax on your business profits and Class 4 National Insurance (NI). Both are calculated through the Self Assessment system and paid by 31 January after the end of the tax year. For 2025/26, you also make a second payment on account by 31 July 2026.
31 January 2026: first payment on account for 2025/26. 31 July 2026: second payment on account. 31 January 2027: balancing payment and Self Assessment filing deadline.
How Income Tax works for sole traders
You pay Income Tax on your taxable profits, not your total income. Taxable profit is your turnover minus allowable business expenses. You can also deduct your Personal Allowance before calculating tax owed.
| Income band (2025/26) | Tax rate |
|---|---|
| Up to £12,570 (Personal Allowance) | 0% |
| £12,571 to £50,270 (basic rate) | 20% |
| £50,271 to £125,140 (higher rate) | 40% |
| Above £125,140 (additional rate) | 45% |
The Personal Allowance reduces by £1 for every £2 of income above £100,000. If your income exceeds £125,140, you receive no Personal Allowance.
National Insurance for sole traders
Self-employed people pay two classes of National Insurance.
- Class 2 NI: A flat weekly rate if your profits exceed the Small Profits Threshold (£6,725 in 2025/26). From 2024/25, Class 2 NI is no longer a separate charge for most people, but you can still build NI credits if your profits are above the threshold.
- Class 4 NI: Charged at 6% on profits between £12,570 and £50,270, and 2% above £50,270.
| Class 4 NI band (2025/26) | Rate |
|---|---|
| Below £12,570 | 0% |
| £12,570 to £50,270 | 6% |
| Above £50,270 | 2% |
What is payment on account?
Payment on account is HMRC's system for collecting tax in advance. If your Self Assessment tax bill exceeds £1,000, HMRC will require you to make two advance payments towards the following year's bill.
Each payment is 50% of your previous year's tax bill. The first payment is due on 31 January, the second on 31 July. If your actual profit turns out to be higher or lower than expected, you pay or reclaim the difference in the following January balancing payment.
In your first year of trading, your January payment will include both the balancing payment for year one and the first payment on account for year two. This can feel like a large bill. Budget around 25 to 30% of your profits for tax throughout the year to avoid a cash shortfall.
Allowable expenses
You can deduct legitimate business expenses from your income before calculating tax. Common examples include:
- Office costs (stationery, postage, software)
- Travel costs (fuel, train fares, parking)
- Clothing (uniforms or protective clothing only)
- Staff costs (wages, subcontractor payments)
- Professional fees (accountant, solicitor fees)
- Marketing costs (website, advertising)
- Home office costs (using simplified expenses or actual proportion)
See our full guide to sole trader allowable expenses for the complete list.
Self Assessment deadlines
| Deadline | What it is |
|---|---|
| 5 October | Register for Self Assessment (new traders) |
| 31 October | Paper Self Assessment filing deadline |
| 31 January | Online filing deadline and tax payment due |
| 31 July | Second payment on account due |
This guide provides general information only and does not constitute financial, tax, or legal advice. For your specific situation, consult a qualified accountant. Find one via our accountant directory.