Self-Employed Tax in the UK (2026-27): Income Tax, Class 4 NI and Self Assessment
Self-employed people in the UK pay income tax on trading profits above the £12,570 Personal Allowance, plus Class 4 National Insurance at 6% on profits between £12,570 and £50,270 and 2% above that. Class 2 NI is treated as paid at no cost once profits reach £7,105, protecting your State Pension record automatically.
Income tax for the self-employed: same bands, different mechanics
Self-employed people pay income tax on their trading profits at the same rUK or Scottish rates as employees — the bands and Personal Allowance are identical. What differs is the mechanism: rather than PAYE collecting tax in real time from a payslip, self-employed individuals calculate and pay tax through Self Assessment. Your taxable profit is your total self-employment income minus allowable business expenses — costs incurred wholly and exclusively for the purposes of the trade. Capital expenditure (buying equipment or vehicles) is treated differently from day-to-day expenses and may qualify for capital allowances rather than an immediate full deduction. Personal spending is never deductible. If your annual self-employment income is £1,000 or less, you may claim the trading allowance instead of needing to register for or file Self Assessment. Once income exceeds £1,000, you must register with HMRC and file a return. Above £1,000 in receipts, you may still choose to deduct the £1,000 trading allowance instead of actual expenses if that produces a higher deductible amount — but you cannot deduct both. Your Adjusted Net Income for income tax purposes is your trading profit minus any pension contributions that reduce ANI directly (for example, contributions to a personal pension where the scheme gives relief at source, the relief is added by the provider; contributions to a scheme under a Net Pay arrangement reduce profit before tax). The Personal Allowance taper — withdrawing £1 of allowance for every £2 of ANI above £100,000 — applies in exactly the same way as for employees.
Class 4 National Insurance: the self-employed NI charge
Self-employed people do not pay Class 1 (employee) NI. Instead, they pay Class 4 NI through Self Assessment. For 2026-27 the Class 4 rates and thresholds are: Lower Profits Limit (LPL): £12,570 per year — aligned with the income tax Personal Allowance, so income tax and Class 4 NI start at the same profit level. Upper Profits Limit (UPL): £50,270 per year — aligned with the higher rate income tax threshold and the Class 1 Upper Earnings Limit. Class 4 NI rate on profits between LPL and UPL: 6%. Class 4 NI rate on profits above UPL: 2%. Class 4 is assessed on trading profits, not on Adjusted Net Income. This means pension contributions do not reduce the Class 4 bill (unlike income tax). The 6% rate has fallen considerably in recent years, from 9% in 2023-24, down to 8% in January 2024, then to 6% from April 2024 onwards. A key advantage of self-employment over employment is that there is no employer equivalent: self-employed people do not pay employer (Class 1 secondary) NI on their own profits. An employee earning £50,000 who moved to self-employment on the same profit would see their combined NI liability change significantly — employees pay 8% on earnings up to the UEL, while the self-employed pay 6% on profits up to the UPL.
Class 2 National Insurance and protecting your State Pension
Class 2 NI is a flat-rate weekly contribution historically paid by the self-employed to build entitlement to the State Pension. Since April 2024, the way Class 2 works has changed substantially. If your annual trading profits are at or above the Small Profits Threshold (SPT) of £7,105 for 2026-27, Class 2 NI is treated as having been paid at zero cost. No cash changes hands, but a qualifying year is added to your NI record automatically. This means most self-employed people with any meaningful level of profit receive State Pension credit without paying anything explicitly for it. If your annual trading profits are below £7,105 — or you have made a loss — Class 2 is not automatically credited. You can still choose to pay voluntary Class 2 at £3.65 per week (£189.80 per year for a full 52 weeks) in order to protect your NI record. You need 35 qualifying years to receive the full new State Pension, so filling gaps early is generally more cost-effective than buying back years later at Class 3 rates. Self-employed people with profits below £7,105 who are not paying Class 2 should check their NI record and model the long-term State Pension impact before deciding whether to pay voluntarily.
Self Assessment: filing, deadlines and payments on account
Self-employed people must register for Self Assessment with HMRC if their annual trading income exceeds £1,000. Registration should happen by 5 October following the end of the first tax year in which you were self-employed. Late registration can trigger penalties. Once registered, you file a Self Assessment tax return online by 31 January following the end of the tax year. For 2026-27 (ending 5 April 2027), the online filing deadline is 31 January 2028. The paper return deadline is earlier, at 31 October 2027. Payments on account are advance payments towards your next year's tax bill. They are required if your Self Assessment liability for the previous year was £1,000 or more and more than 20% of your income was not taxed at source. Each payment is 50% of the prior year's liability: the first is due 31 January during the tax year, the second by 31 July after it ends. A balancing payment — settling the difference between actual liability and what has already been paid — is due 31 January following the tax year. New or first-year self-employed people sometimes face a cash-flow shock in January when their first year's tax and the first payment on account for the following year both fall due simultaneously. Setting aside a proportion of earnings throughout the year — a common rule of thumb is 25-30% of profit, though your actual rate depends on your tax band and NI position — helps avoid this. Always verify your specific payment obligations with a tax professional.
Allowable expenses: what you can deduct to reduce your tax bill
Reducing your taxable profit through allowable business expenses is the most straightforward way to reduce your income tax and Class 4 NI bill as a self-employed person. HMRC allows deductions for costs that are incurred wholly and exclusively for the purposes of the trade. Common allowable expenses include: office costs (stationery, software, postage); travel costs (fuel, public transport, parking — but not ordinary commuting); stock and materials; advertising and marketing; business premises costs (rent, utilities); professional fees (accountant, solicitor); business insurance; professional subscriptions; and staff costs if you employ people. Mixed-use costs — such as a phone used for both business and personal calls, or a room in your home used for work — can only be deducted to the extent of the business proportion. HMRC publishes simplified expense rates for vehicles, working from home, and living in your business premises that can be used instead of calculating exact proportions. Capital expenditure — buying equipment, vehicles, or machinery — is handled separately through capital allowances, most notably the Annual Investment Allowance (AIA) which allows full deduction of qualifying plant and machinery expenditure in the year of purchase up to the AIA limit. Capital allowances rules change frequently; confirm current limits with HMRC guidance or a tax adviser.
FAQ
What is the trading allowance and when can I use it?
The trading allowance lets individuals with annual self-employment or casual income of £1,000 or less receive that income tax-free without needing to register for Self Assessment. If your income exceeds £1,000, you cannot use the allowance to avoid Self Assessment altogether, but you may still choose to deduct £1,000 as your allowable expense amount instead of calculating actual business costs — whichever gives the higher deduction. You cannot deduct both the trading allowance and actual expenses. The status of this allowance should be confirmed against HMRC guidance for each tax year.
What is the difference between Class 2 and Class 4 National Insurance?
Class 2 and Class 4 are both paid by self-employed people through Self Assessment, but they work differently. Class 2 is a flat-rate contribution that builds your National Insurance record (and therefore State Pension entitlement) — for 2026-27 it is treated as paid at no cost if profits reach £7,105. Class 4 is a percentage levy on trading profits (6% between £12,570 and £50,270, then 2% above) that generates NI revenue but does not directly build additional State Pension entitlement beyond what Class 2 provides.
Can pension contributions reduce my self-employed tax bill?
Pension contributions reduce your Adjusted Net Income, which in turn reduces your income tax bill. If your profit is between £100,000 and £125,140, pension contributions can recover the withdrawn Personal Allowance and cut the effective marginal rate from 60% (rUK) or 67.5% (Scotland). However, pension contributions do not reduce Class 4 NI, which is calculated on trading profits rather than on ANI. Personal pension contributions made as relief at source are grossed up by basic-rate tax relief added by the pension provider; higher or additional rate relief is claimed via Self Assessment.
Do I still need to register for Self Assessment if I also have PAYE employment?
Yes. If you have self-employment income above £1,000 alongside PAYE employment, you must still register for and file a Self Assessment return. HMRC uses the return to tax all your income from all sources correctly, taking into account any PAYE tax already deducted at source. Your total income from all sources is added together for the purposes of band allocation and Personal Allowance taper, which can move income that would otherwise be basic-rate into the higher rate band.
⚠️ Informational estimate, not tax advice. Payroll software may differ in edge cases. Verify with a professional.