UK Self-Employed: The Complete Tax and Money Guide

UK self-employment covers sole traders, freelancers, contractors operating outside Personal Service Companies, and gig economy workers earning above the trading allowance. The framework is set by ITTOIA 2005 for income calculation, TMA 1970 for filing and payment, and the FCA's CONC sourcebook for any consumer credit dealings.

This guide walks through registration, the tax framework for 2026/27, the National Insurance position post-2024 reforms, the VAT and CIS regimes where relevant, and Making Tax Digital for Income Tax Self-Assessment beginning April 2026. Each section provides a worked example.

Registering as self-employed

Anyone earning above the GBP 1,000 trading allowance from self-employment must register with HMRC by 5 October following the tax year of starting. For someone starting in May 2026, the deadline is 5 October 2027. Registration is online at gov.uk/register-for-self-assessment.

Registration sets up a Self-Assessment record with HMRC and issues a Unique Taxpayer Reference (UTR). The UTR is the identifier for all SA filings, payments, and HMRC correspondence. It arrives by post within 10 working days of online registration.

The first SA return is due by 31 January following the tax year end - for 2026/27 income, by 31 January 2028. First-year taxpayers commonly pay tax twice in January: the balancing payment for the year just ended plus the first payment on account for the next year (50% of the prior bill).

Worked example: a designer starts self-employment in June 2026. They register on 1 September 2026 (well before the October 2027 deadline). They earn GBP 28,000 in 2026/27. By 31 January 2028 they file the SA return and pay: income tax around GBP 3,086, Class 4 NI around GBP 925, plus a first payment on account of GBP 2,005 toward 2027/28. Total January payment around GBP 6,016. A second payment on account of GBP 2,005 follows on 31 July 2028.

Income tax and Class 4 NI for 2026/27

Self-employed profits are taxed at the same rates as employment income. After the Personal Allowance of GBP 12,570, basic rate 20% to GBP 50,270, higher rate 40% to GBP 125,140, additional rate 45% above. Profits are net of allowable expenses under section 34 ITTOIA 2005 (wholly and exclusively rule).

Class 4 NI on profits: 6% main rate between GBP 12,570 and GBP 50,270, 2% above the UEL. Class 2 NI was abolished for compulsory contributions from 6 April 2024; voluntary Class 2 at GBP 3.45/week remains available for self-employed wanting to build State Pension credits below the small profits threshold (GBP 6,725).

Worked example: a freelancer earns GBP 45,000 of self-employed profit in 2026/27. Income tax: (45,000 - 12,570) * 20% = GBP 6,486. Class 4 NI: (45,000 - 12,570) * 6% = GBP 1,946. Total HMRC bill GBP 8,432. Take-home of self-employed profit after tax and NI is GBP 36,568.

Comparison: an employee earning the same GBP 45,000 pays tax of GBP 6,486 plus Class 1 NI at 8% on the same band = GBP 2,594, total GBP 9,080. The self-employed pays around GBP 648 less in NI for equivalent earnings, reflecting the lower Class 4 rate. The trade-off is loss of employee rights (sick pay, holiday pay, pension auto-enrolment).

The trading allowance and small income

The GBP 1,000 trading allowance covers small self-employed income without the need to register or file. A casual eBay seller, occasional dog walker, or weekend craft seller with income below GBP 1,000 has no SA obligation. Above GBP 1,000, registration is required regardless of profit level.

For income above GBP 1,000 but with high expenses, the trader can choose between actual-expense deduction or the GBP 1,000 allowance. Where expenses exceed GBP 1,000, the actual-expense route gives a lower taxable profit. Where expenses are below GBP 1,000, the allowance gives a lower taxable profit.

The property allowance (also GBP 1,000) operates separately and covers rental income on similar terms. Both can be claimed in the same year for distinct sources.

Worked example: a side-hustle photographer earns GBP 1,800 with GBP 400 of expenses. Choice: deduct GBP 400 actual, taxable profit GBP 1,400, OR claim GBP 1,000 allowance, taxable profit GBP 800. The allowance route saves tax on GBP 600 of profit.

Cash basis versus accruals from April 2024

Cash basis became the default accounting method for sole traders and partnerships with turnover under GBP 150,000 from 6 April 2024. Under cash basis, income is recognised when received and expenses when paid - simpler than the accruals basis that recognises income when earned and expenses when incurred.

The change affects how year-end position is calculated. A trader with GBP 2,000 of invoices outstanding at 5 April recognises that income in the following year under cash basis, not the year of the work. Similarly, expenses paid in March for goods received in April fall in the year of payment.

Accruals basis remains available by election. A trader with significant stock, accrued income, or year-end timing differences may find accruals produces a more accurate profit position. The election is made on the SA return for the relevant year.

Worked example: a consultant invoices GBP 60,000 in 2026/27 but receives GBP 55,000 (rest paid in April 2027). Cash basis 2026/27 income: GBP 55,000. Accruals basis 2026/27 income: GBP 60,000. The GBP 5,000 difference shifts to the next year under cash basis, deferring tax by one year on that slice of income.

VAT registration and the GBP 90,000 threshold

VAT registration is mandatory once taxable turnover exceeds GBP 90,000 in any rolling 12-month period (the threshold rose from GBP 85,000 on 1 April 2024). The registration must happen within 30 days of the threshold being crossed; the effective date is the first day of the second month after the threshold is exceeded.

Once registered, the trader charges VAT at 20% (standard rate), 5% (reduced rate for some categories), 0% (zero-rated for books, children's clothing, basic food), or exempt (no VAT, no input recovery). Quarterly VAT returns are filed through MTD-compatible software since April 2022.

The Flat Rate Scheme simplifies VAT for businesses with turnover under GBP 150,000. The trader pays a flat percentage of gross turnover (varies by industry, typically 7-16%) as VAT, keeping any positive difference from the standard calculation. The scheme suits service businesses with low input VAT.

Voluntary VAT registration is available below the threshold and can be beneficial for B2B service businesses (clients can recover the VAT charged) or businesses with significant input VAT to recover. The decision needs case-by-case analysis.

CIS and the Construction Industry Scheme

Sole traders working in construction must operate under the Construction Industry Scheme (CIS). Contractors deduct tax from payments to subcontractors: 20% for registered subcontractors with verified status, 30% for unverified, or 0% for gross-payment-status subcontractors who have applied and met the criteria.

The deduction is paid to HMRC monthly by the contractor. The subcontractor offsets the deduction against their final tax bill at year-end. CIS deductions exceeding the actual tax liability produce a refund through the SA return.

CIS applies to most construction work: bricklaying, carpentry, electrical, plumbing, painting, decorating, demolition, installation, repair, and related trades. Architecture and surveying are outside CIS scope; cleaning of post-construction sites is typically inside.

Worked example: a registered subcontractor invoices GBP 4,000 for plumbing work. The contractor deducts 20% (GBP 800) and pays GBP 3,200 to the subcontractor. The GBP 800 goes to HMRC. At year-end, the subcontractor's SA shows total CIS deductions of GBP 12,000 against a tax bill of GBP 9,500, producing a GBP 2,500 refund.

MTD ITSA from April 2026

Making Tax Digital for Income Tax Self-Assessment begins 6 April 2026 for sole traders and landlords with combined gross income above GBP 50,000. It extends to combined gross income above GBP 30,000 from 6 April 2027. Below GBP 30,000 the existing annual SA continues.

MTD ITSA requires quarterly digital updates to HMRC through compatible software (Xero, QuickBooks, FreeAgent, Sage, and others). The quarterly update is a simplified income and expenses report; the final year-end declaration replaces the legacy SA return with a more comprehensive submission.

Compatible software costs vary: free options exist for very small businesses; paid options range GBP 10-50 a month for sole trader plans. The software handles the digital filing; the trader categorises transactions and submits.

Practical action: traders above GBP 50,000 should select and implement MTD-compatible software well before April 2026. Trial periods of 1-3 months let the trader test the workflow. Below GBP 30,000 there is no urgency; below GBP 50,000 but above GBP 30,000 there is a year of breathing space before the April 2027 expansion.

Payments on account schedule

Payments on account apply where the SA bill (income tax plus Class 4 NI) exceeds GBP 1,000 and less than 80% has been collected through deduction at source (CIS, PAYE on other employment). Each payment is 50% of the prior year's total bill.

Payment one: 31 January with the balancing payment for the prior year. Payment two: 31 July of the same calendar year. The combined payments effectively pre-pay the next year's bill in advance. Once the actual bill is calculated, a balancing payment or refund clears the difference.

Reducing payments on account is possible where the trader expects lower income in the new year. The reduction is requested through the SA return or the Personal Tax Account. Over-reduction (paying less than the eventual bill needs) attracts interest under section 101 Finance Act 2009 on the shortfall.

Worked example: 2026/27 bill is GBP 8,000. January 2028 payment: GBP 8,000 balancing for 2026/27 + GBP 4,000 first payment on account for 2027/28 = GBP 12,000. July 2028: GBP 4,000 second payment. January 2029: balancing payment for 2027/28 (if it differs from estimate) plus first payment on account for 2028/29.

Record-keeping and software

Section 12B Taxes Management Act 1970 requires self-employed to keep records sufficient to support the SA return for 5 years 10 months after the 31 January filing deadline. Records include: business income (invoices, bank statements showing receipts), business expenses (receipts, bank statements showing payments), business assets and disposals, capital allowances claimed.

Digital record-keeping is acceptable and increasingly required for MTD ITSA from April 2026. Major accounting software (Xero, QuickBooks, FreeAgent, Sage) automates much of the record-keeping by syncing to bank accounts and categorising transactions through AI-driven rules.

Free options exist for the smallest businesses: HMRC's basic spreadsheet templates, free tiers of major software (Wave, Pandle), and simple income/expense apps. Above modest income levels, paid software at GBP 10-30/month typically pays for itself through time saved and accuracy.

Practical action: setting up the record-keeping system at the start of self-employment avoids the trader's most common problem - reconstructing a year of records from scattered receipts in January. The discipline of weekly or monthly bookkeeping prevents the year-end rush.

Frequently asked questions

When do I register as self-employed in the UK?

By 5 October following the tax year of starting self-employment. For a business starting in June 2026 the deadline is 5 October 2027. Registration is online at gov.uk/register-for-self-assessment. HMRC issues a UTR by post within 10 working days. Late registration attracts penalties under Schedule 41 Finance Act 2008 starting at 30% of any tax due.

What's the trading allowance?

GBP 1,000 of self-employed income free of tax and the need to register, under section 783A ITTOIA 2005. Above GBP 1,000, SA registration is required regardless of profit. The trader can choose between deducting actual expenses or claiming the GBP 1,000 allowance, whichever is more beneficial. The property allowance (also GBP 1,000) operates on the same basis for rental income.

How much NI do I pay as self-employed?

Class 4 NI at 6% on profits between GBP 12,570 and GBP 50,270, then 2% above. Class 2 NI was abolished for compulsory contributions from 6 April 2024; voluntary Class 2 at GBP 3.45/week remains available for those below the small profits threshold who want to build State Pension credits. A self-employed person on GBP 35,000 profit pays Class 4 NI of around GBP 1,346 a year.

When does MTD ITSA start?

From 6 April 2026 for sole traders and landlords with combined gross income above GBP 50,000. Extending to combined gross income above GBP 30,000 from 6 April 2027. Below GBP 30,000 the existing annual SA continues. MTD ITSA requires quarterly digital updates plus year-end declaration through compatible software.

Do I need to register for VAT?

Mandatory once taxable turnover exceeds GBP 90,000 in any rolling 12-month period (threshold from 1 April 2024). Registration is within 30 days of crossing the threshold. Voluntary registration is available below the threshold and may benefit B2B service businesses or those with significant input VAT to recover. Once registered, quarterly returns through MTD-compatible software.

How are payments on account calculated?

50% of the prior year's combined income tax and Class 4 NI bill, due 31 January and 31 July each year. Apply where the prior bill exceeds GBP 1,000 and less than 80% was collected through deduction at source. The payments effectively pre-pay the next year's bill; the final balancing payment or refund settles the difference once the actual return is filed.