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.
Quick answers
- How Income Tax works for sole traders: As a sole trader, you use a simple business structure to run your own business, and you and the business are the same legal entity, which means you are personally responsible for business debts.
- National Insurance for sole traders: Self-employed people pay National Insurance contributions.
- Allowable expenses: You can deduct legitimate business expenses from your income before calculating tax, as long as they are incurred wholly and exclusively for the business.
- Self Assessment deadlines: The Self Assessment tax year runs from 6 April to 5 April, so the tax return you file by 31 January covers the previous tax year.
Key dates 2025/26
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
As a sole trader, you use a simple business structure to run your own business, and you and the business are the same legal entity, which means you are personally responsible for business debts. You pay Income Tax on your trading profits, not your total income. Trading profit is your turnover minus allowable business expenses, and how much tax you pay depends on your annual profits after allowable 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% |
Sole traders pay tax only on profits above £12,570, and the main UK tax bands are frozen until April 2031 in England, Wales, and Northern Ireland.
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 National Insurance contributions.
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. If your profits are below the threshold, you may still choose to pay voluntarily in some cases to protect your national insurance record, and these national insurance contributions can help preserve your state pension entitlement.
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, alongside your annual self assessment tax return, with online filing and payment due by 31 January; 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 combined tax and National Insurance bill, so it goes towards next 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. Self Assessment deadlines also include registering by 5 October. A calculator can help you estimate your tax and national insurance before those dates.
First year shock
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 manage cash flow and set money aside for your next tax bill.
Allowable expenses
You can deduct legitimate business expenses from your income before calculating tax, as long as they are incurred wholly and exclusively for the business. Common examples include:
Office costs (stationery, postage, software, business insurance)
Travel costs (fuel, train fares, parking; if you use a car for both work and personal use, you can only claim the business-use proportion of car expenses)
Clothing (uniforms or protective clothing only)
Staff costs (wages, subcontractor payments)
Professional fees (accountant, solicitor fees, professional advice)
Marketing costs (website, advertising)
Home office costs (using simplified expenses or actual proportion, with accurate records)
Everyday meals are usually not allowable expenses unless they qualify under specific business travel rules.
The trading allowance is £1,000 per tax year for self-employed income, and you would usually claim either that or actual expenses, not both.
See our full guide to sole trader allowable expenses for the complete list.
Self Assessment deadlines
The Self Assessment tax year runs from 6 April to 5 April, so the tax return you file by 31 January covers the previous tax year.
| 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 |
If you need to register as self employed, registering as a sole trader is free, and the process involves completing a Self-Assessment form with HMRC online or by post. It can take up to 15 days to receive your Unique Taxpayer Reference, so many sole traders should not leave it until the last minute.
There are also changes ahead called making tax digital. From 6 April 2026, making tax digital starts for sole traders with over £50,000 income, and from April 2027 the threshold drops to £30,000. Under tax digital rules, you will need digital records in compatible software to manage business finances and send quarterly updates to HMRC instead of relying only on one annual self assessment tax return.
You may also need to register for VAT if turnover exceeds the vat threshold of £90,000; some small businesses become vat registered earlier, especially where clients are vat registered businesses that can reclaim vat on added tax.
Disclaimer
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.