20 April 2026
Self-employed tax explained: Income Tax and National Insurance for sole traders
How Income Tax, Class 4 National Insurance, and the trading allowance work for sole traders in 2026/27, plus key Self Assessment dates and Making Tax Digital.
If you work for yourself as a sole trader (freelancing, running a small business, or doing regular contract work), you're taxed differently from an employee. There's no employer handling deductions through payroll; instead, you calculate and pay everything yourself through Self Assessment.
The key figure is your profit, not your turnover: total business income minus allowable business expenses. It's profit that Income Tax and National Insurance are charged on.
Income Tax on your profit
Self-employment profit is taxed using the same Personal Allowance and Income Tax bands as employment income: the £12,570 tax-free allowance, then 20%, 40%, and 45% bands (or the six Scottish bands, if that applies to you). If you also have a salary or other income, it all gets added together to work out which bands your profit falls into.
Class 4 National Insurance
On top of Income Tax, sole traders pay Class 4 National Insurance on their profit: 6% on profits between £12,570 and £50,270, then 2% on anything above that. It's calculated and paid alongside Income Tax through Self Assessment, rather than deducted from pay as it would be for an employee.
What happened to Class 2 National Insurance
Class 2 National Insurance used to be a flat weekly charge that most sole traders paid to build up State Pension entitlement. It was abolished as a compulsory contribution from April 2024. Now, if your profits are £7,105 or more, HMRC treats your Class 2 contributions as having been paid, giving you a qualifying year towards the State Pension automatically, with nothing extra to pay. Class 4 itself doesn't create the qualifying year; it's Class 2 being treated as paid that does.
If your profits are below £7,105, you don't get a qualifying year automatically. You can still choose to pay Class 2 voluntarily, currently £3.65 a week, to protect your State Pension record for that year.
Making Tax Digital for Income Tax
Making Tax Digital for Income Tax became mandatory from 6 April 2026 for sole traders and landlords whose qualifying trading and/or property income was over £50,000 in 2024/25. If that's you, you now need to keep digital records using HMRC-recognised software and send quarterly updates summarising your income and expenses, on top of your usual annual Self Assessment return. The quarterly updates are short summaries, not full tax returns, and HMRC isn't applying penalty points for late ones during 2026/27 as a transitional grace period.
The threshold is being phased down over time: it drops to £30,000 of qualifying income from April 2027, and to £20,000 from April 2028, bringing more sole traders and landlords into scope each year. If you're below the current threshold, ordinary Self Assessment is still all you need for now.
The £1,000 trading allowance
If your self-employment income is small (casual freelance work, selling items online, the odd bit of contract work), the trading allowance lets you earn up to £1,000 a year completely tax-free. In most cases there's no need to register with HMRC or file a return if that's your only income from self-employment, though there are exceptions, for example if you need to file a return for another reason, so it's worth checking HMRC's guidance if you're unsure.
The allowance is applied to your income before expenses are deducted, and you can't claim both the allowance and your actual expenses, just whichever is higher.
Key dates: Self Assessment deadlines and payments on account
The main deadline is 31 January following the end of the tax year. This is when you must file your return and pay any tax owed for that year (your "balancing payment").
If your Self Assessment bill is £1,000 or more, and less than 80% of your tax for the year was collected another way (for example through PAYE on other income), HMRC also asks for payments on account: two advance instalments towards next year's bill, each equal to half of the previous year's liability. The first is due on 31 January, alongside that year's balancing payment, and the second on 31 July, so the January payment can end up being a lot larger than the tax bill alone.
A worked example
Take a sole trader with £40,000 of profit. After the £12,570 Personal Allowance, £27,430 is taxable, all within the basic rate band, giving Income Tax of £5,486. Class 4 National Insurance is charged on the same profit above £12,570: £27,430 at 6% comes to £1,645.80. Together, that's a total tax and National Insurance bill of £7,131.80. Because profit is above £7,105, a State Pension qualifying year is included automatically.
Our Self-Employed Tax Calculator runs this calculation for your own profit figure, including the option to add voluntary Class 2 contributions if your profit is below the Small Profits Threshold.