Written and reviewed by James Whitfield · Updated for 2026/27 · Editorial standards · Methodology
As a UK sole trader in 2026/27, you pay income tax and two classes of National Insurance on your profits. This guide explains how each is calculated, when it is due, and what you can do to reduce the bill.
As a sole trader, you are taxed on your business profits — not your turnover. Profit is turnover minus allowable business expenses. Three taxes apply to most sole traders: income tax on profits above the personal allowance, Class 4 National Insurance on profits above the lower profits limit, and Class 2 National Insurance if profits exceed the small profits threshold.
For 2026/27, the personal allowance is £12,570. Income below this is not taxable. Class 4 NI applies at 6% on profits between £12,570 and £50,270, and at 2% on profits above £50,270. Class 2 NI is a flat £3.45 per week if profits exceed £6,725 — this builds entitlement to State Pension and certain benefits.
Unlike employees, you do not have tax deducted at source. Instead, you pay your income tax and NI through Self Assessment, which must be filed by 31 January after the end of the tax year. Payments on account also apply — HMRC requires estimated prepayments of your following year's tax bill based on the current year.
Income tax applies to profits above the personal allowance (£12,570 in 2026/27). The basic rate of 20% applies to profits between £12,570 and £50,270. The higher rate of 40% applies to profits between £50,270 and £125,140. The additional rate of 45% applies above £125,140.
If your total income (profits plus any other income like rental income, savings interest or employment income) exceeds £100,000, your personal allowance is gradually withdrawn at £1 for every £2 of income above £100,000. At £125,140, the allowance is nil and the effective marginal rate in that band is 60%.
Example: a sole trader with £45,000 profit pays 20% on £45,000 − £12,570 = £32,430 of profit. Income tax = £6,486. Class 4 NI at 6% on the same £32,430 = £1,946. Class 2 NI at £3.45 × 52 = £179.40. Total tax and NI = approximately £8,611.
Class 4 NI is the larger of the two NI contributions for most sole traders. At 6% on profits between £12,570 and £50,270, it adds significantly to the effective rate. A sole trader at £40,000 profit pays Class 4 NI of 6% × (£40,000 − £12,570) = 6% × £27,430 = £1,646.
Class 2 NI is a small flat weekly amount: £3.45 per week in 2026/27 if profits exceed £6,725 (the small profits threshold). That is £179.40 over a full year. Class 2 is valuable because it counts as a qualifying year for State Pension and Maternity Allowance, for a relatively small cost. If profits are below £6,725, you can still pay Class 2 voluntarily to protect your State Pension record.
Both classes are paid as part of your Self Assessment return. They are not paid separately — HMRC calculates them based on your declared profits and includes them in your total tax bill.
If your Self Assessment tax bill exceeds £1,000 and less than 80% of your tax was collected at source (through PAYE), you must make payments on account for the following year. Each payment is 50% of the current year's tax bill, paid on 31 January and 31 July.
In your first year of self-employment, this means your January payment covers both the prior year's tax bill and the first payment on account for the current year. A sole trader owing £5,000 for year 1 will pay £5,000 (year 1 bill) plus £2,500 (first payment on account for year 2) = £7,500 in January, and a further £2,500 in July.
If your actual year 2 profits are lower, you can apply to reduce your payments on account — but be careful, as underestimating creates interest charges. Overpaying means you receive a refund when you file the year 2 return.
Allowable expenses are business costs you can deduct from your income to calculate taxable profit. Common allowable expenses include: tools, materials and stock used in the business; motor expenses on a business mileage basis (45p per mile for the first 10,000 miles, 25p thereafter, using the simplified mileage method); home office costs calculated using the flat rate method (£26/month for 101+ hours worked from home); professional subscriptions and training directly related to your current trade; and accountancy fees.
Capital allowances apply to equipment you buy and keep. The Annual Investment Allowance (AIA) allows you to deduct the full cost of qualifying plant and machinery up to £1,000,000 in the year of purchase, rather than depreciating it over time.
Expenses that are partly personal and partly business must be apportioned. You can only claim the business proportion. Costs that are wholly personal — commuting, meals (except in limited circumstances), clothing that is not a uniform or protective wear — are not allowable.
A sole trader pays income tax at 20%, 40% or 45% on profits above the personal allowance (£12,570), plus Class 4 NI at 6% between £12,570 and £50,270, and Class 2 NI of £3.45/week. At £40,000 profit, total tax and NI is approximately £8,611.
6% on profits between £12,570 and £50,270, and 2% on profits above £50,270. It is paid through Self Assessment alongside income tax.
£3.45 per week for 2026/27 if profits exceed £6,725. It counts as a qualifying year for State Pension and Maternity Allowance. It can be paid voluntarily if profits are below the threshold.
On profit — turnover minus allowable business expenses.