As a sole trader you pay Income Tax and Class 4 National Insurance on your profit — turnover minus allowable expenses — not on the money you take out of the business. Both are calculated on one Self Assessment return and paid on the same dates.
There is no separate “sole trader tax” — just your profit, your Personal Allowance, and two charges on what is left. What catches people out is not the calculation. It is the payment rhythm: 31 January and 31 July, with the first bill often half again as large as expected.
The 2026/27 rates
The tax year runs from 6 April 2026 to 5 April 2027.
| 2026/27 | |
|---|---|
| Personal Allowance | £12,570 |
| Basic rate (20%) | £12,571 – £50,270 |
| Higher rate (40%) | £50,271 – £125,140 |
| Additional rate (45%) | Over £125,140 |
| Class 4 NIC | 6% on profits £12,570 – £50,270 |
| Class 4 NIC | 2% on profits above £50,270 |
| Class 2 NIC | Treated as paid at profits of £7,105 or more |
| Class 2 voluntary rate | £3.65 a week |
The Personal Allowance tapers away above £100,000 of adjusted net income — £1 lost for every £2 over — and reaches nil at £125,140.
Income Tax bands are different in Scotland. Scotland sets its own rates and bands for non-savings, non-dividend income, including trading profit. National Insurance is UK-wide, so the Class 2 and Class 4 figures apply everywhere.
What happened to Class 2 National Insurance
You almost certainly do not pay it any more. For 2026/27, if your profits are £7,105 or more, Class 2 contributions are treated as having been paid. Nothing is collected, but your record is credited — protecting entitlement to the State Pension and contributory benefits at no cost.
Below £7,105 you pay nothing automatically — but you get no credit either. You can choose to pay voluntary Class 2 at £3.65 a week to secure a qualifying year, which is among the cheapest ways to fill a gap. Check your National Insurance record before deciding.
It still matters at registration. Form CWF1 enrols you for Class 2, and if you skip it your National Insurance record has a gap even though there is nothing to pay.
Working out your profit
Profit is turnover minus allowable expenses. Allowable means wholly and exclusively for the purposes of the trade — office costs, travel, stock, staff, insurance, bank charges, premises, advertising and training that keeps existing skills current.
Two methods exist:
- Cash basis — the default since 2024/25. You record income when the money arrives and expenses when you pay the bill, so you do not pay tax on invoices you have not been paid for.
- Traditional accounting (accruals) — income and expenses recorded by invoice date. You must tick a box on your return to opt out of cash basis and use it.
Claim the £1,000 trading allowance instead and you cannot deduct expenses or capital allowances. It is one or the other.
Worked example: turnover to tax paid
Aisha starts trading on 1 May 2026. Her year to 5 April 2027 produces turnover of £62,000 and allowable expenses of £14,000.
Step 1 — profit. £62,000 − £14,000 = £48,000.
Step 2 — Income Tax. Deduct the Personal Allowance: £48,000 − £12,570 = £35,430 of taxable income. All of it falls in the basic rate band, so 20% × £35,430 = £7,086.
Step 3 — Class 4 National Insurance. 6% on profit between £12,570 and £50,270. Her profit is £48,000, so the charge is 6% × £35,430 = £2,125.80.
Step 4 — Class 2. Profits are above £7,105, so it is treated as paid. £nil.
Step 5 — total 2026/27 liability. £7,086 + £2,125.80 = £9,211.80.
That is the number Aisha budgeted for. It is not the number HMRC asks for on 31 January 2028.
Payments on account: the bit that surprises people
Payments on account are advance instalments toward next year’s bill — two of them, on 31 January and 31 July, each half of the previous year’s Income Tax and Class 4 liability.
They are not required if:
- the previous year’s tax owed was under £1,000, or
- more than 80% of your tax was already collected at source, for example through PAYE.
Aisha’s £9,211.80 is over £1,000 with nothing collected at source, so payments on account start immediately.
| Date | What is due | Amount |
|---|---|---|
| 31 January 2028 | 2026/27 balancing payment | £9,211.80 |
| 31 January 2028 | First payment on account for 2027/28 | £4,605.90 |
| 31 January 2028 total | £13,817.70 | |
| 31 July 2028 | Second payment on account for 2027/28 | £4,605.90 |
Her first bill is 150% of the tax she calculated. This is the most common cause of a first-year cash flow crisis. The following January her 2027/28 liability is reduced by the £9,211.80 already paid on account, and the cycle settles down.
If profit falls you can apply to reduce payments on account. Reduce them too far and HMRC charges interest on the shortfall, currently 7.75%.
The dates that matter
For the 2026/27 tax year:
| Deadline | Date |
|---|---|
| Register for Self Assessment | 5 October 2027 |
| Paper return | 31 October 2027 |
| File online for tax under £3,000 to go through your PAYE code | 30 December 2027 |
| Online return | 31 January 2028 |
| Balancing payment + first payment on account | 31 January 2028 |
| Second payment on account | 31 July 2028 |
For 2025/26 — the year most sole traders are filing now — register by 5 October 2026, paper return 31 October 2026, online return and payment 31 January 2027, second payment on account 31 July 2027.
Late filing costs £100 immediately, even with no tax to pay, then £10 a day from three months (maximum £900), then 5% of the tax due or £300 — whichever is greater — at six months and again at twelve. Late payment penalties are 5% of the unpaid tax at 30 days, six months and twelve months, plus interest.
One qualification, and it may well be yours. A points-based penalty regime replaced that structure from 6 April 2026, but only for taxpayers mandated into Making Tax Digital for Income Tax — the over-£50,000 cohort described in the next section — plus volunteers. Everyone else is still on £100/£900/5%. It extends to everyone filing a personal Self Assessment return from April 2027.
If you are in that April 2026 cohort, your 2026/27 late payment penalties are not 5% / 5% / 5%.
| How late the payment is | Penalty |
|---|---|
| Up to 15 days | No penalty |
| 16 to 30 days | 3% of the tax owed, charged at day 15 |
| 31 days or more | 3% at day 15, plus 3% at day 30, plus 10% annualised charged daily on the outstanding balance from day 31 |
The two fixed charges rise to 4% and 4% for 2027/28. The 10% annualised charge stays as it is.
Late submission runs on points rather than fixed penalties. Each missed deadline earns a point, and a £200 charge falls due once you reach the 4-point threshold.
Two things take the edge off the first year:
- HMRC will not apply penalty points for late quarterly updates during 2026/27. That is a soft landing on the quarterly obligation only — it does nothing for late payment.
- The new penalties apply from the tax year you join MTD, not retrospectively. So the April 2026 cohort’s 2025/26 return, due 31 January 2027, is still judged under the old £100 / £900 / 5% regime.
Records, and Making Tax Digital
Keep your records for five years after the 31 January filing deadline if you are self-employed or a landlord. For 2026/27, that means until 31 January 2033.
MTD for Income Tax is live. From 6 April 2026, sole traders and landlords with qualifying income over £50,000 (measured on the 2024/25 return) must keep digital records and submit quarterly updates by 7 August, 7 November, 7 February and 7 May, plus a year-end return. The £30,000 tier joins on 6 April 2027 and the £20,000 tier on 6 April 2028.
Quarterly updates are summary submissions, not five tax returns — reliefs and allowances are still dealt with at the year end. HMRC identifies who is in scope and writes to confirm your start date.
Frequently asked questions
Do I pay tax on what I take out of the business?
No. You are taxed on profit, whether you withdraw it or leave it in the business bank account. Money you take for personal use, known as drawings, is not an allowable expense and does not reduce your tax.
How much can I earn before paying tax as a sole trader?
You pay no Income Tax on profits within the £12,570 Personal Allowance, and no Class 4 National Insurance on profits up to £12,570. Separately, if your gross trading income for the year is £1,000 or less, the trading allowance means you generally do not have to tell HMRC at all.
Do I still have to pay Class 2 National Insurance?
Not if your profits are £7,105 or more — contributions are treated as paid and your record is credited without any charge. Below that level you can pay voluntary Class 2 at £3.65 a week to protect State Pension entitlement.
Can I reduce my payments on account?
Yes, if you expect a lower liability. Apply through your Self Assessment account or on the return. If you reduce them below what turns out to be due, HMRC charges interest on the difference, currently 7.75%, so base it on real figures rather than optimism.
What if I have a job as well as my business?
You are taxed on your combined income. Your PAYE earnings use the Personal Allowance and basic rate band first, so your trading profit is often taxed entirely at 20% or 40%. Class 4 is still charged on trading profit above £12,570, and Class 1 on your salary is separate.
Getting the numbers right
Sole trader tax is arithmetic. The judgement calls sit around it: which expenses qualify, cash basis or accruals, whether the trading allowance beats your actual costs, and whether MTD applies this year or next.
SmartFiling handles Self Assessment and MTD for Income Tax on a fixed fee, covering quarterly updates where MTD applies and the year-end return. Every submission is reviewed by an ICAEW Chartered Accountant, and turnaround is three weeks from receiving your records.
