If you work for yourself in the UK — whether as a sole trader, freelancer, or contractor outside IR35 — you pay income tax on your profits plus two classes of National Insurance that employed workers do not encounter: Class 2 and Class 4.
How Self-Employment Income Tax Works
Self-employed income tax is calculated the same way as for employees: your trading profits (turnover minus allowable expenses) are added to any other income you have, and tax is applied using the standard bands (20% basic, 40% higher, 45% additional for England/Wales/NI; Scotland has its own six-band structure). You receive the same £12,570 Personal Allowance.
The key difference is collection. Employees have tax deducted at source through PAYE; the self-employed pay through Self Assessment, filing a return by 31 January after the end of the tax year.
Class 2 National Insurance
Class 2 NI is a flat weekly charge that gives you access to the State Pension, Maternity Allowance, and certain other contributory benefits.
| Tax Year | Weekly Rate | Annual Cost | Small Profits Threshold |
|---|---|---|---|
| 2025/26 | £3.45 | ~£179.40 | £6,725 |
| 2024/25 | £3.45 | ~£179.40 | £6,725 |
If your profits are below the Small Profits Threshold (£6,725), you are not required to pay Class 2 NI but can choose to pay voluntarily to protect your State Pension record.
Class 4 National Insurance
Class 4 NI is a percentage charge on your annual trading profits. Unlike Class 2, it does not provide additional benefit entitlements — it is purely a tax on self-employed earnings.
| Band | Profits Range (2025/26) | Rate |
|---|---|---|
| Main rate | £12,570 – £50,270 | 6% |
| Upper rate | Above £50,270 | 2% |
Class 4 is collected alongside your income tax through Self Assessment. The thresholds align with the income tax Personal Allowance and the Upper Earnings Limit, simplifying the calculation.
Payments on Account
If your Self Assessment tax bill exceeds £1,000 (after deducting tax taken at source), HMRC requires you to make two payments on account — advance payments toward next year’s bill:
- First payment: 31 January (during the tax year)
- Second payment: 31 July (after the tax year ends)
Each payment on account is 50% of the previous year’s total tax and Class 4 NI liability. A balancing payment is due on 31 January the following year if the actual liability exceeds the payments made.
You can apply to reduce payments on account if you expect lower profits this year, but if you reduce them too far, HMRC charges interest on the underpayment.
Allowable Business Expenses
Self-employed workers can deduct legitimate business expenses before calculating taxable profit. Common deductions include:
- Office costs (stationery, phone, broadband)
- Travel and vehicle costs (mileage at 45p/mile for the first 10,000 miles)
- Clothing required for work (uniforms, not everyday clothes)
- Professional subscriptions and insurance
- Accountancy and legal fees
- A proportion of home costs if you work from home (simplified expenses or actual cost basis)
Registering with HMRC
You must register as self-employed with HMRC by 5 October following the tax year in which you started trading. Registration is done online and triggers the requirement to file Self Assessment returns. Failure to register on time can result in penalties.
Key Takeaway
Self-employed workers face a combined burden of income tax, Class 2 NI, and Class 4 NI. Understanding the thresholds and planning for payments on account avoids cash flow surprises. Use our self-employment tax calculator to see your full breakdown.