Self-Employed Tax UK Guide 2025: What Sole Traders Owe HMRC

Going self-employed in the UK means you become your own payroll department. There is no employer deducting tax each month, no P60 at year end, and no safety net if you set aside too little. HMRC expects you to register, keep records, file a self assessment return, and pay income tax and National Insurance on your profits. Get it right and the tax bill is predictable. Get it wrong and January brings a nasty surprise plus possible penalties.

This guide covers what sole traders owe HMRC for 2025/26, how profits are calculated, and what you can legitimately deduct. Use our self-employed tax calculator to estimate your income tax and National Insurance based on your expected annual profit.

Registering as self-employed with HMRC

You must register for self assessment by 5 October following the end of the tax year in which you started trading. If you began freelancing in June 2025, the 2025/26 tax year ends on 5 April 2026, and your registration deadline is 5 October 2026. Registering late does not automatically incur a penalty, but failing to register at all before HMRC discovers your income can result in fines and backdated tax demands.

Registration is done online at gov.uk/register-for-self-assessment. You receive a Unique Taxpayer Reference (UTR) within about 10 working days, followed by an activation code for your Government Gateway account. You need both to file your return. If you were employed and still are, your employer continues handling PAYE while you file self assessment for your self-employed profits on top.

How profit is calculated

Your taxable profit equals your total self-employed income minus allowable business expenses. If you invoiced £55,000 in 2025/26 and had £12,000 in legitimate expenses, your taxable profit is £43,000. This figure goes on your self assessment return and is added to any other income (employment, rental, dividends) to determine your total tax liability.

Allowable expenses must be incurred wholly and exclusively for business purposes. Common deductions include office costs, travel to client sites, professional subscriptions, accountancy fees, business insurance, phone and internet (business proportion), equipment, and marketing. Personal expenses, commuting to a regular workplace, and client entertainment are not allowable. HMRC's Business Income Manual sets out the rules in detail.

Income tax rates for 2025/26

Self-employed income tax uses the same bands as employment. For 2025/26 in England, Wales and Northern Ireland: the personal allowance is £12,570 (zero tax), the basic rate of 20% applies to income from £12,571 to £50,270, the higher rate of 40% applies from £50,271 to £125,140, and the additional rate of 45% applies above £125,140. Scottish taxpayers use different bands set by the Scottish Parliament.

If you have employment income as well, your personal allowance and basic rate band may be partially used by PAYE before self-employed profits are taxed. HMRC reconciles everything on your self assessment return. A freelancer earning £43,000 in profit with no other income pays 20% on £30,430 (the profit above the personal allowance), which is £6,086 in income tax.

Estimate your combined tax position with our self-employed tax calculator and cross-check your expected take-home with our UK salary calculator if you also have employed earnings.

National Insurance for sole traders

Self-employed workers pay Class 4 National Insurance on profits above £12,570 at 6% up to £50,270, and 2% on profits above that. Class 2 NI (the flat weekly rate) was abolished from April 2024, so Class 4 is now the main NI charge for sole traders. On £43,000 profit, Class 4 NI is 6% of £30,430, which equals £1,825.80.

Voluntary Class 2 contributions can still be paid to protect your State Pension record if your profits fall below the Small Profits Threshold. This is worth considering if you are in a low-earning year or just starting out. For full details on Class 4 rates and thresholds, see our Class 4 National Insurance guide.

Record keeping and Making Tax Digital

HMRC requires you to keep records of all income and expenses for at least five years after the 31 January filing deadline for that tax year. For 2025/26, filed by 31 January 2027, records must be kept until at least January 2032. Digital records are acceptable and increasingly expected under Making Tax Digital for Income Tax Self Assessment (MTD ITSA), which becomes mandatory from April 2026 for self-employed individuals with income above £50,000, and from April 2027 for those above £30,000.

Under MTD ITSA, you must use compatible software to keep digital records and submit quarterly updates to HMRC alongside the annual self assessment return. Popular options include FreeAgent, Xero, QuickBooks and Coconut. Quarterly updates are not full tax calculations. They are summaries of income and expenses that help HMRC track your position through the year.

Essential records for sole traders

• All sales invoices and payment receipts
• Expense receipts and bank statements
• Mileage logs for business travel
• Bank account dedicated to business (strongly recommended)
• Contracts and agreements with clients
• Previous year's self assessment returns and HMRC correspondence

Setting aside money for tax

A practical rule is to set aside 25% to 30% of each payment you receive for tax and National Insurance. On profits around £30,000 to £50,000, the effective rate (income tax plus Class 4 NI) is roughly 26% to 32% after the personal allowance. Higher earners above £50,270 should set aside closer to 35% to 40% because of the higher rate band.

Open a separate savings account for tax money and transfer your set-aside percentage every time a client pays you. This prevents the common mistake of spending revenue that was never truly yours. Remember that payments on account (covered in our self assessment deadlines guide) mean you may need to make two advance payments during the year as well as the final balancing payment on 31 January.

Self-employed tax is not complicated once you have a system. Register on time, track every invoice and expense, set aside a fixed percentage of income, and use our self-employed tax calculator to forecast your January bill before it arrives. If you are also considering a limited company structure, our sole trader vs limited company comparison covers when incorporation makes financial sense.

Simplified expenses and flat-rate deductions

HMRC offers simplified expenses for sole traders who prefer flat rates over calculating actual costs. You can claim 45p per mile for the first 10,000 business miles per year (25p thereafter) instead of tracking fuel, insurance and wear-and-tear separately. For working from home, flat rates range from £10 to £26 per month depending on hours worked at home. For living at your business premises (common for B&B owners), a flat rate based on household size applies.

Simplified expenses are optional. If your actual costs exceed the flat rates, claim the actual amounts instead. A freelance consultant driving 12,000 business miles per year would claim £4,800 at the simplified rate (10,000 x 45p plus 2,000 x 25p). If actual motoring costs were £6,200, the actual figure saves more tax. Keep mileage logs either way, because HMRC can ask for evidence that journeys were genuinely business-related.

VAT registration considerations

VAT registration is compulsory once your VATable turnover exceeds £90,000 in any rolling 12-month period (the threshold from 1 April 2024). Below that, registration is voluntary. Registering means charging VAT at 20% on your invoices, reclaiming VAT on business purchases, and filing quarterly VAT returns through Making Tax Digital. For B2B services where clients can reclaim VAT, registration is often neutral. For B2C services, adding 20% to your prices may affect competitiveness.

The Flat Rate Scheme simplifies VAT for businesses with turnover under £150,000, letting you pay a fixed percentage of gross turnover rather than calculating input and output VAT separately. The percentage varies by sector (14.5% for management consultants, 7.5% for computer and IT consultancy). You cannot reclaim input VAT on purchases under the Flat Rate Scheme except for capital assets over £2,000, so it suits service businesses with low expenses rather than those buying significant stock or equipment.

Employed and self-employed at the same time

Many sole traders also have employed income. Your employer handles PAYE on your salary, while self assessment covers your self-employed profits and reconciles the total tax position. If your combined income pushes you into the higher rate band (£50,271+), your self-employed profits are taxed at 40% on the portion above the threshold, even if your employment income alone kept you in the basic rate.

Class 4 NI is calculated only on self-employed profits, not on employment earnings (which are subject to Class 1 NI through PAYE). Pension contributions made through your employer's scheme reduce your PAYE income but personal pension contributions made via self assessment extend your basic rate band, which can reduce the higher-rate tax on self-employed profits. The interaction between employed and self-employed tax is one of the main reasons sole traders with mixed income use accountants for their first few returns.