Sole trader tax UK 2026: what you pay, when and how to file

Tax and Salary

Operating as a sole trader is the simplest form of self-employment in the UK. You register with HMRC, report your income and expenses through self-assessment, and pay income tax and National Insurance on your taxable profits. There is no separate legal entity; you and the business are the same person legally, which means unlimited personal liability for business debts but also minimal administrative complexity compared with running a limited company.

The sole trader tax calculation follows the same income tax rates and bands as employment income: the personal allowance (£12,570 in 2025/26), basic rate at 20%, higher rate at 40%, and additional rate at 45%. National Insurance for the self-employed changed significantly in April 2024 when Class 2 NI (a flat weekly charge) was abolished; self-employed individuals now pay only Class 4 NI on profits above the lower profits limit. This guide covers how the tax calculation works, allowable expenses, self-assessment filing, and the payment on account system.

How sole trader income tax is calculated

Your taxable profit as a sole trader is your total business income less all allowable business expenses in the tax year (6 April to 5 April). From this profit, you then deduct any applicable reliefs (such as pension contributions and loss relief from earlier years) to arrive at net income for the year. Income tax is then applied in bands: the first £12,570 falls within the personal allowance and is tax-free; the next band up to £50,270 is taxed at 20% basic rate; profits from £50,271 to £125,140 are taxed at 40% higher rate; and profits above £125,140 at 45% additional rate. If your sole trader profit is your only income, these bands apply directly. If you have employment income or other income in the same year, all income sources are added together to determine which rate bands apply to the trading profit, as income tax is calculated on total annual income rather than separately by source.

National Insurance for the self-employed in 2025/26

Class 2 National Insurance - the flat weekly charge that self-employed individuals previously paid - was abolished from April 2024. This removed a charge of £3.45 per week (approximately £179 per year) from self-employed workers with profits above the small profits threshold. Class 4 NI remains and is calculated as a percentage of profits: 6% on profits between £12,570 and £50,270, and 2% on profits above £50,270. Class 4 NI is calculated and collected through self-assessment alongside income tax. For sole traders who also have employment income and pay Class 1 NI on their employed earnings, the Class 4 NI on sole trader profits may be reduced to avoid double NI payment on the same pounds of income above the upper earnings limit; HMRC applies the deferment automatically in self-assessment.

Allowable business expenses

Allowable expenses are costs incurred wholly and exclusively for the purposes of the business. They reduce your taxable profit and therefore your income tax and NI liability. Common allowable expenses for sole traders include: cost of goods purchased for resale; staff wages (if any); rent and utility costs for business premises; business insurance; professional services fees (accountant, solicitor); marketing and advertising; equipment and tools; vehicle costs where used for business (either actual costs or the HMRC flat rate per mile - 45p for the first 10,000 miles, 25p thereafter in 2025/26); home working costs where part of the home is used for business (either actual apportioned costs or HMRC's simplified flat rate); and professional subscriptions. Capital expenditure - the cost of long-term assets such as vehicles or equipment - is not deducted as an expense directly; instead, Annual Investment Allowance (AIA) of up to £1 million per year allows the full cost of most plant and machinery to be deducted in the year of purchase through capital allowances.

Self-assessment filing and key deadlines

New sole traders must register for self-assessment by 5 October following the end of the first tax year in which they were self-employed. Failure to register on time can result in a penalty. The self-assessment tax return for each year (6 April to 5 April) must be filed by 31 January (online) or 31 October (paper) following the tax year end. The tax due for the year - income tax and Class 4 NI on profits - must be paid by 31 January. Where your tax bill for the year exceeds £1,000, HMRC also requires payments on account: two equal instalments each equal to 50% of the previous year's bill, due on 31 January and 31 July. The January payment on account is paid at the same time as the balancing payment for the previous year, which can create a large cash outflow in January for newly self-employed individuals in their second year of trading. Plan for this by setting aside funds throughout the year.

Making Tax Digital for Income Tax

Making Tax Digital for Income Tax Self-Assessment (MTD ITSA) is HMRC's programme to require digital record-keeping and quarterly reporting for self-employed individuals and landlords. From April 2026, sole traders and landlords with total gross annual income above £50,000 must use MTD-compatible software to maintain digital records and submit quarterly updates to HMRC. Those with income above £30,000 are included from April 2027. The quarterly submissions are summaries of income and expenses; a final declaration (replacing the annual tax return) is still submitted once per year. MTD ITSA does not change how tax is calculated or when it is paid; it changes how information is reported to HMRC. HMRC provides a list of compatible software products at gov.uk. If you are above the threshold, start using compatible software now to avoid a compliance burden at the implementation date.

Related guides

• UK self-assessment 2026 guide
• Limited company tax UK 2026
• UK dividend tax 2026
• All Tax and Salary guides →

Frequently asked questions

When do I need to register as a sole trader with HMRC?

You must register for self-assessment by 5 October following the end of the first tax year in which you earned self-employed income above £1,000. If you started trading in the 2025/26 tax year (from 6 April 2025), you must register by 5 October 2026. Register online at gov.uk/register-for-self-assessment. Failure to register on time can result in a late registration penalty, though HMRC may waive it if you have a reasonable excuse and register promptly.

Do I pay NI if my sole trader profits are below the personal allowance?

No. Class 4 NI applies only to profits above £12,570 in 2025/26. If your profits are below this threshold, no Class 4 NI is due. Class 2 NI (the flat weekly charge) was abolished from April 2024. If your profits are very low, you may wish to pay voluntary Class 3 NI contributions to protect your state pension entitlement, at £17.45 per week in 2025/26.

Can I reduce my tax bill by paying into a pension as a sole trader?

Yes. Personal pension contributions made by a sole trader attract income tax relief at your marginal rate. Basic rate relief is added by the pension provider; if you are a higher rate taxpayer, claim the additional 20% relief through self-assessment. Pension contributions also reduce your taxable income, which can move some of your profits out of a higher tax band. The annual pension allowance of £60,000 or 100% of earnings applies.

What records do I need to keep as a sole trader?

You must keep records of all business income and expenses for at least five years after the 31 January self-assessment deadline for the relevant tax year. HMRC can investigate returns up to four years back for innocent errors, six years for careless errors, and 20 years for deliberate non-compliance. Records include invoices, receipts, bank statements, mileage logs, and any other documentation supporting the figures in your return. Digital records are accepted; paper records should be scanned and backed up.

What is the trading allowance and how does it work?

The trading allowance of £1,000 per year means you do not need to pay tax or NI on the first £1,000 of self-employed income in a tax year, and do not need to register for self-assessment if your only self-employment income is below this amount. If your turnover is above £1,000, you can deduct either your actual allowable expenses or the £1,000 allowance - whichever gives the better outcome. You cannot use both the allowance and actual expenses in the same tax year.

How we verified this guide

All tax rates, NI rates, and filing deadlines were verified against HMRC self-assessment guidance, HMRC National Insurance for the self-employed guidance, and HMRC MTD ITSA timetable during May 2026. Rates and thresholds reflect 2025/26 tax year. We do not accept payment from tax advisers and do not earn commission on accounting referrals.

Primary sources

• HMRC - Self-employed National Insurance rates 2025/26
• HMRC - Self-assessment tax returns guidance
• Citizens Advice - Self-employment tax guide
• MoneyHelper - Tax when self-employed

Last reviewed: May 2026.