Self-employed tax 2026 — how much to put aside and how to avoid the January shock

Every year, thousands of self-employed people face a shocking Self Assessment bill in January. Not because they did something wrong — but because nobody explained how UK tax works when you do not have an employer deducting it automatically. This guide fixes that.

What taxes do self-employed people pay in 2026/27?

As a sole trader, you pay two taxes on your profits:

1. Income Tax — exactly the same rates as employees:
   • 0% on the first £12,570 (Personal Allowance)
   • 20% on profits from £12,571 to £50,270
   • 40% on profits from £50,271 to £125,140
   • 45% on profits above £125,140
2. Class 4 National Insurance — paid on trading profits:
   • 6% on profits between £12,570 and £50,270
   • 2% on profits above £50,270

If your profits are above £7,105 per year, you also build qualifying years towards your State Pension automatically — no separate Class 2 NI payment is required since the rules changed in April 2024.

Exactly how much should you set aside?

The right percentage depends on your profit level. Here are practical guidelines:

• Profit under £12,570: Set aside nothing — you are within the Personal Allowance and owe no income tax or NI
• Profit £12,570 to £25,000: Set aside approximately 20–22% of every pound earned (income tax + Class 4 NI combined)
• Profit £25,000 to £50,000: Set aside approximately 26–28%
• Profit above £50,000: Set aside approximately 42–45% on profits in the higher rate band

The old rule of thumb "save 20–30%" is still reasonable as a rough guide, but the exact figure matters — use our calculator to get your precise number.

The payments-on-account trap

This is the single biggest shock for first-time self-employed workers. When you file your first Self Assessment return, HMRC does not just ask you to pay the tax for the year you have just completed. It also asks you to make advance payments towards your next year's bill.

These "payments on account" work as follows:

• Each is worth 50% of your previous year's tax bill
• The first payment is due on 31 January (same date as your current year's bill)
• The second payment is due on 31 July

Example: Your first-year tax bill is £4,000. On 31 January, you owe £4,000 (current year) + £2,000 (first payment on account) = £6,000 in one go. Many people are completely unprepared for this. The solution is to set aside the extra 50% in your savings from year one.

What counts as 'allowable expenses'?

You only pay tax on profit, not turnover. Deducting legitimate business expenses reduces your taxable profit. Common allowable expenses include:

• Home office costs (proportional share of rent/mortgage interest, heating, electricity)
• Business mileage (55p per mile at the new 2026 rate, using simplified mileage — see our mileage calculator)
• Equipment, tools, and software used for business
• Professional subscriptions and training directly relevant to your work
• Bank charges on your business account
• Accountancy fees
• Marketing and advertising costs

You cannot deduct personal expenses, the cost of buying a car (though you can deduct business mileage), or entertainment costs for clients.

Sole trader vs limited company — which pays less tax?

At lower profit levels, being a sole trader is simpler and the tax difference is small. As your profit grows above £30,000–£40,000, a limited company structure can save significant tax — but only if you do not need to draw all your profits as salary. The comparison is complex because of the Employer NI on directors' salaries and the dividend tax increases of recent years. Use our contractor salary and dividends calculator to model both scenarios at your profit level.

Making Tax Digital for self-employed — are you affected?

Making Tax Digital for Income Tax (MTD ITSA) is being rolled out in phases. If your self-employment income is above £50,000, you must be compliant from April 2026. If above £30,000, from April 2027. Compliance means keeping digital records and submitting quarterly updates to HMRC instead of one annual return.

Check our Making Tax Digital checker to see if and when you need to comply.

Frequently Asked Questions

I am employed and self-employed at the same time — how does that work?

You pay PAYE through your employment in the normal way. For your self-employment income, you complete a Self Assessment return each year and pay income tax and Class 4 NI on your trading profits on top. Your Personal Allowance is shared between both income sources — HMRC will adjust your PAYE tax code to reflect your self-employed income if it is significant. Use our side hustle tax calculator to model your combined situation.

When do I need to register for Self Assessment?

You must register by 5 October in the year after you first earned self-employment income above £1,000. So if you first earned self-employment income in the 2025/26 tax year (ending 5 April 2026), you must register by 5 October 2026. Missing this deadline can result in a £100 penalty.

Do I need to charge VAT?

You must register for VAT once your taxable turnover exceeds £90,000 in any rolling 12-month period. Below this threshold, VAT registration is voluntary. Use our VAT calculator to understand how VAT registration would affect your pricing and cash flow.

Can I claim my pension contributions to reduce my tax bill?

Yes — pension contributions are one of the most effective ways to reduce your self-employed tax bill. As a self-employed person, you can contribute up to 100% of your earnings (capped at £60,000) into a pension and receive full income tax relief. A basic-rate taxpayer paying £8,000 net into a pension automatically gets it topped up to £10,000 by HMRC. Higher-rate taxpayers can claim an additional 20% relief through their Self Assessment return.

I had a very bad year — can I reduce my payments on account?

Yes. If you know your current year's profits will be significantly lower than the previous year (on which the payments on account are based), you can apply to reduce the payment on account to a more realistic figure. Do this through your Self Assessment account or by contacting HMRC. If you reduce it incorrectly and your actual tax is higher, you will owe interest on the shortfall — but there is no penalty for making a genuine estimate in good faith.