Sole traders pay Income Tax on business profits at rates of 20%, 40%, or 45%, depending on total income. You also pay Class 2 and Class 4 National Insurance contributions. For the 2025/26 tax year, the Personal Allowance is £12,570—you pay no tax on profits up to this amount.
This guide covers current tax rates, National Insurance, and how to calculate your sole trader tax bill.
Income Tax Rates 2025/26
Income Tax applies to your taxable profit (income minus allowable expenses):
| Band | Taxable Income | Rate | |------|----------------|------| | Personal Allowance | £0 – £12,570 | 0% | | Basic Rate | £12,571 – £50,270 | 20% | | Higher Rate | £50,271 – £125,140 | 40% | | Additional Rate | Over £125,140 | 45% |
Personal Allowance
The Personal Allowance is the amount you can earn tax-free each year. For 2025/26, it's £12,570.
Important: If your total income exceeds £100,000, your Personal Allowance reduces by £1 for every £2 above £100,000. It disappears entirely at £125,140.
| Total Income | Personal Allowance | |--------------|-------------------| | Up to £100,000 | £12,570 | | £110,000 | £7,570 | | £120,000 | £2,570 | | £125,140+ | £0 |
Tax Band Calculation
Your self-employment profit is added to any other income (employment, rental, etc.) to determine your tax band.
Example: You earn £20,000 from employment and £25,000 profit from self-employment.
- Total income: £45,000
- Personal Allowance used by employment
- All self-employment profit taxed at 20% basic rate
National Insurance Rates 2025/26
Sole traders pay two classes of National Insurance:
Class 2 National Insurance
| Threshold | Rate | |-----------|------| | Profits over £6,725/year | £3.45 per week |
Annual cost: £3.45 × 52 = £179.40
Class 2 NI counts towards your State Pension entitlement. If profits are below £6,725, you can pay voluntarily to protect your pension record.
Class 4 National Insurance
| Profit Band | Rate | |-------------|------| | £12,570 – £50,270 | 6% | | Over £50,270 | 2% |
Class 4 NI is paid through your Self Assessment tax return.
NI Calculation Example
Profit: £40,000
| NI Type | Calculation | Amount | |---------|-------------|--------| | Class 2 | £3.45 × 52 weeks | £179.40 | | Class 4 | 6% × (£40,000 − £12,570) | £1,645.80 | | Total NI | | £1,825.20 |
Complete Tax Calculation Examples
Example 1: Basic Rate Taxpayer
Sarah: Freelance Writer
- Gross income: £35,000
- Allowable expenses: £5,000
- Taxable profit: £30,000
Income Tax: | Band | Amount | Rate | Tax | |------|--------|------|-----| | Personal Allowance | £12,570 | 0% | £0 | | Basic Rate | £17,430 | 20% | £3,486 | | Total Income Tax | | | £3,486 |
National Insurance: | Type | Calculation | Amount | |------|-------------|--------| | Class 2 | £3.45 × 52 | £179.40 | | Class 4 | 6% × £17,430 | £1,045.80 | | Total NI | | £1,225.20 |
Total Tax Bill: £4,711.20 Effective Tax Rate: 15.7%
Example 2: Higher Rate Taxpayer
James: IT Consultant
- Gross income: £85,000
- Allowable expenses: £10,000
- Taxable profit: £75,000
Income Tax: | Band | Amount | Rate | Tax | |------|--------|------|-----| | Personal Allowance | £12,570 | 0% | £0 | | Basic Rate | £37,700 | 20% | £7,540 | | Higher Rate | £24,730 | 40% | £9,892 | | Total Income Tax | | | £17,432 |
National Insurance: | Type | Calculation | Amount | |------|-------------|--------| | Class 2 | £3.45 × 52 | £179.40 | | Class 4 (6%) | 6% × £37,700 | £2,262 | | Class 4 (2%) | 2% × £24,730 | £494.60 | | Total NI | | £2,936 |
Total Tax Bill: £20,368 Effective Tax Rate: 27.2%
Example 3: Additional Rate Taxpayer
Emma: Management Consultant
- Gross income: £180,000
- Allowable expenses: £20,000
- Taxable profit: £160,000
Personal Allowance: £0 (income over £125,140)
Income Tax: | Band | Amount | Rate | Tax | |------|--------|------|-----| | Basic Rate | £37,700 | 20% | £7,540 | | Higher Rate | £87,440 | 40% | £34,976 | | Additional Rate | £34,860 | 45% | £15,687 | | Total Income Tax | | | £58,203 |
National Insurance: | Type | Calculation | Amount | |------|-------------|--------| | Class 2 | £3.45 × 52 | £179.40 | | Class 4 (6%) | 6% × £37,700 | £2,262 | | Class 4 (2%) | 2% × £109,730 | £2,194.60 | | Total NI | | £4,636 |
Total Tax Bill: £62,839 Effective Tax Rate: 39.3%
Tax Rates Summary Table
| Profit Level | Income Tax | NI | Total Tax | Effective Rate | |--------------|------------|-----|-----------|----------------| | £15,000 | £486 | £325 | £811 | 5.4% | | £20,000 | £1,486 | £625 | £2,111 | 10.6% | | £30,000 | £3,486 | £1,225 | £4,711 | 15.7% | | £40,000 | £5,486 | £1,825 | £7,311 | 18.3% | | £50,000 | £7,486 | £2,425 | £9,911 | 19.8% | | £60,000 | £11,432 | £2,736 | £14,168 | 23.6% | | £75,000 | £17,432 | £2,936 | £20,368 | 27.2% | | £100,000 | £27,432 | £3,436 | £30,868 | 30.9% |
Assumes no other income and full Personal Allowance where applicable.
The £100,000 Trap
When income exceeds £100,000, you lose £1 of Personal Allowance for every £2 earned above this threshold. This creates an effective 60% marginal tax rate between £100,000 and £125,140.
| Income | Personal Allowance Lost | Extra Tax | |--------|------------------------|-----------| | £100,000 | £0 | — | | £105,000 | £2,500 | £1,000 | | £110,000 | £5,000 | £2,000 | | £125,140 | £12,570 | £5,028 |
Planning tip: If income is just over £100,000, consider:
- Increasing pension contributions (reduces taxable income)
- Timing expenses to reduce profit
- Deferring income to a future year
Payment Dates
When Tax is Due
| Deadline | What's Due | |----------|------------| | 31 January | Tax for previous year + first payment on account | | 31 July | Second payment on account |
Payments on Account
If your tax bill exceeds £1,000 (and less than 80% was deducted at source), you must make payments on account—advance payments toward next year's tax.
Each payment on account = 50% of previous year's bill
Example:
- 2024/25 tax bill: £6,000
- 31 January 2026: Pay £6,000 (24/25 bill) + £3,000 (first POA for 25/26)
- 31 July 2026: Pay £3,000 (second POA for 25/26)
First year surprise: Your first Self Assessment payment includes the full year's tax PLUS 50% payment on account. Budget accordingly.
Reducing Payments on Account
If you expect to earn less next year, you can reduce payments on account through your HMRC online account. Be careful—underestimate and you'll owe interest.
Reducing Your Tax Bill
1. Claim All Allowable Expenses
Many sole traders under-claim. Common missed expenses:
- Home office costs
- Phone and internet (business portion)
- Professional subscriptions
- Training courses
- Mileage
Learn more: Sole Trader Expenses Guide
2. Pension Contributions
Contributions to a personal pension:
- Reduce your taxable income
- Receive 20% tax relief automatically
- Higher rate taxpayers claim additional 20% via Self Assessment
Example: Contribute £4,000, receive £5,000 in your pension (£1,000 tax relief). If higher rate taxpayer, claim another £1,000 on your return.
3. Use Your Personal Allowance
If you have a spouse who earns less than £12,570:
- Pay them for legitimate work in your business
- Up to £12,570 is tax-free for them
- Reduces your taxable profit
The work must be genuine and payment reasonable for the role.
4. Capital Allowances
Buy equipment before your year-end to reduce this year's profit. The Annual Investment Allowance gives 100% relief on qualifying purchases up to £1 million.
5. Time Income and Expenses
If you're near a tax band threshold:
- Delay invoicing to push income to next year
- Bring forward expenses to claim this year
- Make pension contributions before year-end
Comparing to Employment
How does sole trader tax compare to being employed?
| Factor | Sole Trader | Employee | |--------|-------------|----------| | Income Tax rates | Same (20/40/45%) | Same | | National Insurance | Class 2 + Class 4 | Class 1 (8%) | | Employer's NI | None (you're not an employer) | Employer pays 13.8% | | Expenses | Can claim against profit | Limited claims | | Payment timing | Twice yearly | Monthly via PAYE |
Key difference: Employees pay 8% Class 1 NI (up to £50,270), while sole traders pay 6% Class 4 NI—slightly less. However, sole traders must manage their own tax payments.
Scottish Income Tax Rates
If you live in Scotland, different Income Tax rates apply:
| Band | Taxable Income | Rate | |------|----------------|------| | Personal Allowance | £0 – £12,570 | 0% | | Starter Rate | £12,571 – £14,876 | 19% | | Basic Rate | £14,877 – £26,561 | 20% | | Intermediate Rate | £26,562 – £43,662 | 21% | | Higher Rate | £43,663 – £75,000 | 42% | | Advanced Rate | £75,001 – £125,140 | 45% | | Top Rate | Over £125,140 | 48% |
National Insurance rates are the same across the UK.
Future Changes
Frozen Thresholds
The Personal Allowance (£12,570) and basic rate threshold (£50,270) are frozen until April 2028. As wages rise with inflation, more people move into higher tax bands—known as "fiscal drag."
Making Tax Digital
From April 2026 (income over £50,000) or April 2027 (over £30,000), sole traders must comply with Making Tax Digital:
- Digital record-keeping
- Quarterly submissions to HMRC
- Same tax rates apply
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