Written and reviewed by James Whitfield · Updated August 2026 · Checked against 2026/27 HMRC rates · 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.
For 2026/27 a sole trader pays Income Tax and Class 4 National Insurance on taxable profit — turnover minus allowable expenses. The first £12,570 of profit is tax-free. Income Tax is then 20% up to £50,270, 40% up to £125,140 and 45% above. Class 4 NI is 6% on profit between £12,570 and £50,270 and 2% above. Class 2 NI is treated as paid for anyone with profit over £7,105, so most sole traders owe nothing extra for it.12 On £40,000 of profit that works out at £7,132 in tax and NI, leaving £32,868.
As a sole trader, you are taxed on your business profits — not your turnover. Profit is turnover minus allowable business expenses. Two taxes apply to most sole traders: Income Tax on profits above the personal allowance, and Class 4 National Insurance on profits above the lower profits limit. Class 2 National Insurance still exists on paper, but for 2026/27 it is treated as already paid once your profit is over the small profits threshold, so there is usually nothing extra to hand over.
For 2026/27, the personal allowance is £12,570. Profit below this is not taxable.1 Class 4 NI applies at 6% on profits between £12,570 and £50,270, and at 2% on profits above £50,270.2 Class 2 NI is where people get tripped up: since April 2024 you do not pay it if your profits are above the small profits threshold (£7,105 for 2026/27) — you are simply credited as if you had, which protects your State Pension record. Below that, you can pay it voluntarily at £3.65 a week to keep your record intact.2
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.4 Payments on account also apply once your bill tops £1,000 — HMRC asks for estimated prepayments toward next year's tax 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 between £50,270 and £125,140. The additional rate of 45% applies above £125,140.1
Here is how it comes together for a sole trader with £40,000 of taxable profit. Every figure below matches the sole trader tax calculator on this site.
| Taxable profit | £40,000 |
| Income Tax — 20% on £27,430 (£40,000 − £12,570) | £5,486.00 |
| Class 4 NI — 6% on £27,430 | £1,645.80 |
| Class 2 NI — treated as paid (profit above £7,105) | £0.00 |
| Total tax and NI | £7,131.80 |
| Take-home profit | £32,868.20 |
Push profit above £50,270 and two things change at once: the slice above £50,270 is taxed at 40%, and Class 4 NI on that slice drops to 2%. If your total income tops £100,000, the personal allowance tapers away at £1 for every £2 over the line, which creates an effective 60% marginal rate between £100,000 and £125,140. That band is the one worth planning a pension contribution around.
Class 4 NI is the National Insurance that actually costs most sole traders money. At 6% on profits between £12,570 and £50,270, it adds meaningfully to the effective rate. A sole trader at £40,000 profit pays Class 4 NI of 6% × (£40,000 − £12,570) = 6% × £27,430 = £1,645.80.2
Class 2 NI is the one that confuses people. It used to be a flat weekly charge, but since 6 April 2024 self-employed people with profits above the small profits threshold — £7,105 for 2026/27 — no longer pay it. You are treated as having paid, so the qualifying year still counts toward your State Pension and benefits like Maternity Allowance, at no cost.2 Only if your profit is below £7,105 do you need to act: you can pay Class 2 voluntarily at £3.65 a week to avoid a gap in your record. That is why the calculator on this site shows Class 4 but not a Class 2 line — for the vast majority of traders there is nothing to add.
Class 4 is collected as part of your Self Assessment return. You do not pay it separately — HMRC works it out from your declared profit and folds it into your total bill alongside Income Tax.
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.
Income Tax at 20%, 40% or 45% on profits above the £12,570 personal allowance, plus Class 4 NI at 6% between £12,570 and £50,270 and 2% above. On £40,000 of profit that is £5,486 Income Tax and £1,646 Class 4 NI — about £7,132 in total, leaving £32,868. Class 2 NI is treated as paid above £7,105 of profit, so there is usually nothing to add.
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.
For most people, no. If your profit is above the small profits threshold (£7,105 for 2026/27) you are treated as having paid Class 2 — your State Pension record is protected but there is nothing to pay. Only if your profit is below £7,105 might you choose to pay it voluntarily, at £3.65 a week, to keep your record intact.
On profit — turnover minus allowable business expenses.
The rates, thresholds and rules in this article are drawn from the official HMRC and GOV.UK sources below, using the confirmed 2026/27 figures. Each link opens the relevant official page in a new tab.