Sole Trader Tax 2026/27: What You Pay, When and How to Pay Less

As a sole trader you pay income tax and Class 4 National Insurance on your business profits — turnover minus allowable expenses — not on the money you take out of the business. In 2026/27 the first £12,570 of profit is normally covered by the Personal Allowance, then you pay 20% income tax plus 6% Class 4 NI on profits up to £50,270, and 40% income tax plus 2% Class 4 NI above that (Scottish income tax rates differ). Everything is reported on one Self Assessment return, with tax due on 31 January and, for most people, payments on account on 31 January and 31 July.

• Profit, not turnover, is taxed — so expenses and capital allowances directly cut your bill.
• The combined marginal rate on profits between £12,570 and £50,270 is 26% (20% tax + 6% Class 4).
• Above £50,270 it is 42% (40% tax + 2% Class 4) in England, Wales and Northern Ireland.
• Your first tax bill can feel like 150% of a normal year, because payments on account for the next year are bolted on.
• Making Tax Digital for Income Tax starts in April 2026 if your gross self-employment or property income is over £50,000.

How sole trader tax is worked out

There are three possible charges on your profits:

Income tax

Your profits are added to any other taxable income (employment, pensions, rent, interest) and taxed after your Personal Allowance of £12,570. In England, Wales and Northern Ireland the bands on taxable income are 20% on the first £37,700, 40% up to £125,140 and 45% above that. The allowance is reduced by £1 for every £2 of income over £100,000, so it disappears entirely at £125,140.

Class 4 National Insurance

Class 4 is charged at 6% on profits between £12,570 and £50,270, then 2% on everything above £50,270. It is calculated on your self-employed profits alone, not your total income, and it is collected through Self Assessment alongside your income tax.

Class 2 National Insurance

Class 2 is no longer a compulsory charge. If your profits are above the small profits threshold of £7,105 you build up a qualifying year for the State Pension without paying anything. If profits are below £7,105 (or you make a loss) you can choose to pay voluntary Class 2 at £3.65 a week — about £189.80 for the year — to protect your National Insurance record. That is far cheaper than voluntary Class 3 at £18.40 a week.

Sole traders do not pay Corporation Tax and cannot pay themselves a dividend or a salary — the profit is yours as it is earned, and drawings are not a deductible expense.

The sole trader thresholds that matter in 2026/27

Note the VAT threshold is about turnover, not profit, and is tested on a rolling 12-month basis — not your accounting year.

How much tax do sole traders pay? Two worked examples

Profits of £45,000 (England, Wales or Northern Ireland)

• Taxable income: £45,000 − £12,570 = £32,430, all within the £37,700 basic-rate band
• Income tax: £32,430 × 20% = £6,486
• Class 4 NI: £32,430 × 6% = £1,945.80
• Total: £8,431.80, an effective rate of 18.7% of profits

Profits of £70,000 (England, Wales or Northern Ireland)

• Taxable income: £70,000 − £12,570 = £57,430
• Income tax: £37,700 × 20% = £7,540, plus £19,730 × 40% = £7,892 → £15,432
• Class 4 NI: £37,700 × 6% = £2,262, plus £19,730 × 2% = £394.60 → £2,656.60
• Total: £18,088.60, an effective rate of 25.8%

The jump between the two shows why the £50,270 line matters so much: every extra £100 of profit below it costs £26 in tax and NI, and every extra £100 above it costs £42.

If you live in Scotland

Scottish income tax rates apply to your profits (non-savings income); Class 4 NI is the same across the UK. The Scottish bands are 19% starter, 20% basic, 21% intermediate, 42% higher, 45% advanced and 48% top rate, with the higher rate starting at £43,662 of income rather than £50,270.

On £45,000 of profits the Scottish income tax works out as £3,967 at 19% (£753.73), £12,989 at 20% (£2,597.80), £14,136 at 21% (£2,968.56) and £1,338 at 42% (£561.96) — a total of £6,882.05. That is £396.05 more income tax than the same profits in England, and the Class 4 charge of £1,945.80 is identical, giving a combined bill of £8,827.85.

Payments on account: why your first bill is bigger

Self Assessment collects tax after the year has ended, so HMRC asks most sole traders to pay next year's tax in two instalments in advance. Each payment on account is 50% of the previous year's income tax and Class 4 NI, due on 31 January and 31 July. Any shortfall is settled as a balancing payment the following 31 January.

You are outside the system if your last bill (after tax deducted at source) was under £1,000, or if more than 80% of your tax was already collected at source — for example through PAYE on an employment.

Example: first full year of trading

Take the £45,000 example above, with a 2026/27 bill of £8,431.80 and no payments on account made during the year:

• 31 January 2028: £8,431.80 balancing payment + £4,215.90 first payment on account for 2027/28 = £12,647.70
• 31 July 2028: £4,215.90 second payment on account
• 31 January 2029: balancing payment for 2027/28, plus the first payment on account for 2028/29

If your profits fall you can apply to reduce your payments on account, but if you reduce them too far HMRC charges interest on the shortfall. Our payments on account calculator shows both instalments and the January total so you can plan the cash.

Expenses and allowances that cut the bill

Anything spent wholly and exclusively for the business is deductible: stock, materials, subcontractors, insurance, software, accountancy fees, bank charges, advertising, phone and broadband (business share), and travel that is not ordinary commuting. Two simplified methods save a lot of record-keeping:

• Use of home as office: a flat £10 a month for 25–50 hours of home working, £18 for 51–100 hours and £26 for 101 hours or more — up to £312 a year with no bills to keep.
• Mileage: 55p a mile for the first 10,000 business miles and 25p after that, instead of claiming running costs and capital allowances on the vehicle.

Equipment, tools, vans and machinery are usually claimed in full in the year of purchase under the Annual Investment Allowance, which covers up to £1,000,000 of spending. Cars are treated differently and get writing-down allowances at 18% or 6% depending on emissions.

If your total trading income is £1,000 or less, the trading allowance makes it tax-free. Above that you can either deduct the £1,000 allowance instead of your expenses or claim actual expenses — whichever is higher. A pension contribution also reduces your taxable income, which can be worth doing if profits push you over £50,270 or £100,000.

Making Tax Digital from April 2026: the big change

This is the main sole trader change for 2026. From 6 April 2026, if your gross self-employment and property income combined is more than £50,000, you must:

1. keep digital records of income and expenses in compatible software;
2. send HMRC a quarterly update of those totals; and
3. submit a final declaration after the tax year to confirm the figures and claim reliefs.

Qualifying income is measured on gross income before expenses, and HMRC uses the figures from your earlier returns to decide whether you are in scope. Quarterly updates are not four tax bills — payment dates are unchanged, so the balancing payment and payments on account still fall on 31 January and 31 July.

The threshold is then due to fall to £30,000 from April 2027 and £20,000 from April 2028, bringing far more sole traders in.

Two other points of timing are worth knowing. Profits are now taxed on a tax-year basis, so accounts drawn up to 31 March or 5 April keep life simple. And if you started trading in 2026/27, you must register for Self Assessment by 5 October 2027 and file online by 31 January 2028.

What to do next

Run your expected profit through the self-employed tax calculator to see the income tax and Class 4 split, then use the payments on account calculator to work out what has to be on the table each 31 January and 31 July. If you have only just started, the beginner's guide to self-employed tax walks through registration, records and your first return, and you can register for Self Assessment on GOV.UK when you are ready.