Everything you need to know about how HMRC taxes sole trader profits — with worked examples and a full 2026/27 rates reference
As a sole trader, you are self-employed in the simplest legal form — there is no separate company structure. You and your business are the same legal entity. HMRC taxes your trading profits (income minus allowable expenses) through the Self Assessment system rather than via PAYE.
You pay two types of tax on your profits:
Unlike employment, there is no PAYE deduction at source. You are responsible for calculating, filing and paying your own tax each year.
Your profits are taxed using the same Income Tax bands that apply to employed workers in England, Wales and Northern Ireland:
| Taxable profit | Rate | What this means |
|---|---|---|
| Up to £12,570 | 0% | Personal Allowance — tax-free |
| £12,571 – £50,270 | 20% | Basic Rate — £37,700 band |
| £50,271 – £125,140 | 40% | Higher Rate — £74,870 band |
| Over £125,140 | 45% | Additional Rate |
Class 4 NI is calculated on your trading profits and collected alongside Income Tax through Self Assessment. The 2026/27 rates are:
| Profit band | Class 4 NI rate |
|---|---|
| Up to £12,570 | 0% |
| £12,571 – £50,270 | 6% |
| Over £50,270 | 2% |
Class 2 NI (the flat weekly contribution of £3.45) was abolished from April 2024. If your profits exceed the Small Profits Threshold (£6,725 in 2026/27), HMRC now grants NI credits automatically — you do not need to make any additional payment to protect your State Pension entitlement.
If your profits are below £6,725, you can make voluntary Class 2 contributions (£179.40/year) to maintain your National Insurance record. This is optional but may be worthwhile if you have gaps in your State Pension record.
You can deduct wholly and exclusively business expenses from your income before calculating your tax. The larger your allowable deductions, the lower your tax bill.
If your gross trading income (before expenses) is £1,000 or less, it is completely tax-free and you do not need to file a Self Assessment return for it. If your income exceeds £1,000, you have a choice: deduct actual expenses, or claim the £1,000 Trading Allowance instead. For most active businesses, deducting actual expenses saves more tax.
You cannot deduct the cost of buying capital equipment (laptops, tools, machinery) as a regular expense. Instead, you claim capital allowances. The Annual Investment Allowance (AIA) allows you to deduct the full cost of most plant and machinery in the year of purchase — up to £1 million per year, which covers virtually all small business equipment purchases.
As a sole trader, you must file a Self Assessment tax return each year. Key deadlines for the 2026/27 tax year:
| Date | What's due |
|---|---|
| 5 April 2027 | End of the 2026/27 tax year |
| 5 October 2027 | Register for Self Assessment if not already registered |
| 31 October 2027 | Deadline for paper tax returns |
| 31 January 2028 | Online return filing deadline + tax bill payment + first payment on account |
| 31 July 2028 | Second payment on account |
If your Self Assessment tax bill exceeds £1,000, HMRC requires you to make advance payments toward next year's bill — called payments on account. Each payment is 50% of your current year's bill:
This catches many new sole traders off guard. In your first significant year:
Self-employed people can contribute to a personal pension or SIPP (Self-Invested Personal Pension) and receive income tax relief at their marginal rate. Contributions attract basic rate (20%) tax relief automatically — HMRC adds this to your pension pot. Higher and additional rate taxpayers claim the extra relief through their Self Assessment return.
Key rules:
See the pension tax relief guide for a full breakdown of how relief works.
Emma invoices £33,000 and claims £5,000 in allowable expenses (home working, phone, subscriptions, mileage). Taxable profit: £28,000.
Raj is a self-employed software developer with £68,000 in annual profit after expenses.
Sophie runs a small Etsy business alongside part-time work. Self-employed profit: £9,500. Note: HMRC combines all income when calculating tax — this example assumes her Etsy income is her only income in the year.
A sole trader pays Income Tax and Class 4 NI on trading profits. For 2026/27: 0% on first £12,570, 20% up to £50,270, 40% to £125,140, 45% above. Class 4 NI: 6% on profits £12,570–£50,270 and 2% above. Use our self-employed tax calculator for an exact figure.
The online filing deadline is 31 January after the end of the tax year. For 2026/27 (ending 5 April 2027), the deadline is 31 January 2028. If your tax bill exceeds £1,000, HMRC will also require payments on account due 31 January and 31 July.
Office costs, travel (45p/mile first 10,000 miles), home working (£6/week flat rate or proportional), professional fees, marketing, stock, materials and bank charges — all provided they are wholly and exclusively for business purposes. Capital equipment is handled via capital allowances rather than a direct deduction.
Yes — Class 4 NI at 6% on profits £12,570–£50,270 and 2% above. Class 2 NI was abolished from April 2024. NI credits are now granted automatically for profits above £6,725, protecting your State Pension.
If your tax bill exceeds £1,000, HMRC requires two advance payments toward next year's bill. Each is 50% of your current bill: one on 31 January (alongside your current year payment) and one on 31 July. In your first high-earning year you can pay up to 150% of one year's tax in a single January — plan your cash flow accordingly.