Self-Employment Tax Guide UK — A Complete Guide for Sole Traders

Going self-employed is one of the most rewarding career decisions you can make — but it also means taking charge of your own tax affairs. This guide walks you through everything a sole trader needs to know about tax in the UK, from registering with HMRC to filing your return and paying what you owe.

Registering as Self-Employed

When you start working for yourself, you must register with HMRC for Self Assessment. The deadline is 5 October in your business’s second tax year. So if you begin trading any time between 6 April 2025 and 5 April 2026, you need to register by 5 October 2026.

You can register online at gov.uk. You’ll need your National Insurance number and some basic details about your business. HMRC will send you a Unique Taxpayer Reference (UTR) number by post — keep this safe, as you’ll need it every time you file.

Don’t delay registration. Late registration can lead to penalties and means HMRC won’t have you on their radar in time for your first tax bill.

Sole Trader vs Limited Company

Most people starting out choose to be a sole trader — it’s simpler and cheaper. But as your profits grow, a limited company structure can become more tax-efficient.

As a rough guide, incorporating might become beneficial when your profits consistently exceed £40,000–£50,000 — but the decision depends on many factors including your personal circumstances, dividend income, and future plans.

What Taxes Do Self-Employed People Pay?

As a sole trader, you may pay up to four types of tax:

1. Income Tax — 20%, 40%, or 45% on taxable profits above the £12,570 Personal Allowance
2. Class 2 National Insurance — £3.45 per week if profits exceed £12,570
3. Class 4 National Insurance — 6% on profits between £12,570 and £50,270, plus 2% on profits above £50,270
4. VAT — Only if your taxable turnover exceeds £90,000 (see our VAT guide)

Use our self-employment tax calculator to get a personalised breakdown of your tax bill.

Calculating Your Taxable Profit

Your taxable profit is straightforward to calculate:

Taxable Profit = Total Business Income (Turnover) − Allowable Expenses

Allowable expenses are costs you incur wholly and exclusively for your business — things like materials, travel, insurance, and office costs. The more legitimate expenses you claim, the less tax you pay. See our allowable expenses guide for a comprehensive list.

If your expenses are minimal, you can use the £1,000 Trading Allowance instead — you simply deduct £1,000 from your income without needing to keep expense records.

Keeping Records

HMRC requires you to keep records of all your business income and expenses. You must retain records for at least five years after the 31 January submission deadline for the relevant tax year.

Records you should keep include:

• All sales invoices and receipts
• Bank statements for business accounts
• Purchase receipts and expense records
• Mileage logs for business travel
• Records of any assets bought or sold

Making Tax Digital for Income Tax

From April 2026, self-employed individuals with income over £50,000 will be required to use Making Tax Digital (MTD) for Income Tax. This means:

• Using HMRC-compatible software to keep digital records
• Sending quarterly income and expense summaries to HMRC
• Submitting a final declaration instead of a traditional tax return

Those earning over £30,000 will follow from April 2027. Start using digital bookkeeping software now to prepare — options include FreeAgent, Xero, and QuickBooks.

Filing Your Self Assessment Tax Return

Here’s the step-by-step process:

1. Gather your records — Compile all income and expense information for the tax year (6 April to 5 April)
2. Log in to HMRC — Use your Government Gateway account at gov.uk
3. Complete the SA100 form — Enter your personal details, income sources, and any employment income
4. Fill in the self-employment supplement (SA103) — Enter your turnover, expenses, and net profit
5. Declare other income — Savings interest, rental income, dividends, etc.
6. Claim reliefs and allowances — Pension contributions, charitable donations, Marriage Allowance
7. Submit and pay — HMRC calculates your bill automatically once you’ve submitted

Deadlines:

• Paper returns: 31 October
• Online returns: 31 January
• Payment: 31 January

Payments on Account

If your Self Assessment bill exceeds £1,000 (and less than 80% of your tax was deducted at source), HMRC requires payments on account — two advance instalments towards your next year’s tax:

• 31 January — First payment (50% of previous year’s bill)
• 31 July — Second payment (50% of previous year’s bill)

Any remaining balance is settled on the following 31 January as a balancing payment.

If your income drops

You can apply to reduce your payments on account through your HMRC online account. This is sensible if you know your profits have fallen significantly. However, if you over-reduce and end up owing more, HMRC will charge interest on the underpayment.

Construction Industry Scheme (CIS)

If you work as a subcontractor in the construction industry, the contractor you work for may deduct tax from your payments under the Construction Industry Scheme (CIS). The standard deduction rate is 20% (or 30% if you’re not registered with HMRC for CIS).

These deductions count as advance payments of your income tax — you’ll get credit for them when you file your Self Assessment return. If more was deducted than you owe, you’ll receive a refund.

Common Mistakes to Avoid

1. Missing deadlines — Late filing and late payment attract penalties and interest. Set calendar reminders for 31 January and 31 July.
2. Not saving for your tax bill — A good rule is to set aside 25–30% of your profits in a separate savings account throughout the year.
3. Failing to claim all expenses — Many sole traders miss legitimate deductions. Review our allowable expenses guide to make sure you’re claiming everything you’re entitled to.
4. Mixing personal and business finances — Open a separate business bank account. It makes bookkeeping easier and creates a clear audit trail.
5. Ignoring payments on account — Your first January bill can be a shock. Plan ahead by understanding that it may include the previous year’s tax plus the first payment on account.
6. Not keeping records long enough — Retain records for at least five years after the filing deadline. HMRC can open an enquiry within this window.

Related Tools and Guides

• Self-Employment Tax Calculator — See exactly what you’ll owe on your profits
• Allowable Expenses Guide — Full list of deductible business costs
• National Insurance Guide — How NI works for the self-employed and employed
• VAT Guide for Small Businesses — Registration thresholds, rates, and schemes