Self-Employed in the UK: Tax, National Insurance and Pensions Guide (2026/27)
Working for yourself in the UK usually means registering as a sole trader with HMRC — free, quick, and done online — then paying income tax on your profits through Self Assessment each year. On top of income tax you pay Class 4 National Insurance: 6% on profits between £12,570 and £50,270, and 2% above £50,270. Pension contributions of up to £60,000 a year attract tax relief at your marginal rate, and £20,000 a year can be sheltered from all UK tax inside an ISA.
Step 1: register as a sole trader
Register with HMRC by 5 October in your business's second tax year (start trading in 2026/27 → register by 5 October 2027). You will get a Unique Taxpayer Reference (UTR) for Self Assessment. Registration is free and takes minutes online; you can also trade under a business name, which must not include "limited", "Ltd", or imply a company. Keep business records from day one — bank statements, invoices, receipts — for at least 5 years after the 31 January filing deadline.
What counts as profit
Profit = turnover minus allowable expenses. If your turnover is under £1,000, the trading allowance covers it and you do not even need to register. Common allowable expenses include office costs, travel and vehicle costs, stock and raw materials, professional fees (accountant, legal), insurance, marketing, and a reasonable share of home-office costs. Simplified expenses let you use HMRC flat rates instead of calculating exact proportions for vehicles, working from home, and business premises. From the 2024/25 tax year, cash basis accounting is the default for sole traders (turnover up to £150,000): you record income and expenses when money actually moves, rather than when invoiced.
National Insurance: Class 4 (and the end of Class 2)
| Profits | Class 4 rate |
|---|---|
| Up to £12,570 | 0% |
| £12,570 – £50,270 | 6% |
| Above £50,270 | 2% |
Class 2 National Insurance — the old flat weekly charge — was abolished from 6 April 2024. If your profits are between £6,725 and £12,570, you are treated as having paid Class 2 for State Pension purposes without paying anything; below £6,725 you can pay voluntary Class 2 to protect your State Pension record. Unlike employee NI, there is no employer contribution — the full cost sits with you, so price it into your rates.
Income tax on your profits
Profits are added to any other income and taxed at the standard bands: 0% up to £12,570, 20% to £50,270, 40% to £125,140, 45% above (England, Wales, Northern Ireland; Scotland differs — see our bands guide). Because nothing is deducted at source, expect a real bill each 31 January — and payments on account: if you owe over £1,000, HMRC collects two advance payments toward next year (31 January and 31 July), each worth 50% of the current bill. First-year freelancers are routinely shocked by paying 150% of year one's bill in January; budget for it from month one.
Making Tax Digital is now live for the self-employed
From 6 April 2026, sole traders and landlords with qualifying income above £50,000 must follow Making Tax Digital for Income Tax: keep digital records and send quarterly updates to HMRC using compatible software, plus a final year-end declaration. The threshold drops to £30,000 from April 2027. If you are near the line, choose MTD-compatible bookkeeping software now rather than migrating under pressure.
Pensions: the £60,000 annual allowance
Contributions to a registered pension get tax relief at your marginal rate — a 40% taxpayer effectively gets £40 back for every £100 contributed (part automatic at 20%, the rest reclaimed via Self Assessment for personal pensions; workplace "net pay" schemes handle it through payroll). The annual allowance is £60,000, and you can carry forward unused allowance from the previous 3 years. High earners face the taper: if threshold income exceeds £200,000 and adjusted income exceeds £260,000, the allowance shrinks by £1 for every £2 over £260,000, down to a £10,000 minimum. Once you start flexibly drawing a pension, the Money Purchase Annual Allowance caps future contributions at £10,000 a year. For most freelancers, a SIPP (self-invested personal pension) is the standard vehicle — no employer needed.
ISAs: £20,000 a year, tax-free forever
You can save or invest £20,000 per tax year across Cash ISAs, Stocks and Shares ISAs, and Innovative Finance ISAs, with all interest, dividends, and gains permanently UK tax-free. A Lifetime ISA (£4,000 of the £20,000, for ages 18–39) adds a 25% government bonus for a first home or retirement. Junior ISAs (£9,000 per child per year) are separate. ISAs do not reduce your income tax bill the way pensions do — they shelter the growth, which compounds powerfully over decades.
Sole trader vs limited company
Roughly: below £40,000–£50,000 profit, sole trader usually wins on simplicity. Above that, a limited company can win on tax — corporation tax is 19% on profits up to £50,000 and 25% above £250,000 (with marginal relief between), and you pay yourself a small salary plus dividends (taxed at 8.75%/33.75%/39.25% after the £500 allowance). The trade-off is real admin: payroll, annual accounts, confirmation statements, and Companies House filings. Contractors should also check the off-payroll (IR35) rules before choosing a company route.
Frequently asked questions
Do I need an accountant?
Not legally. But one usually pays for itself in the first year — allowable expenses, payments on account, and pension relief are where newcomers leak money. At minimum, use proper bookkeeping software from day one.
Can I employ my spouse or partner?
Yes — a genuinely employed spouse can use their own Personal Allowance and lower-rate bands, and their salary is an allowable expense. The work and pay must be real; HMRC challenges artificial arrangements.
What if I make a loss?
Trading losses can be offset against your other income in the same or previous year, or carried forward against future profits of the same trade. Keep immaculate records — loss claims attract HMRC attention.
I also have a part-time job. How does that work?
Employment income and self-employment profits are combined on one Self Assessment return. Your PAYE tax code may be adjusted, and the £12,570 allowance is shared across both — you do not get it twice.
Sources
- GOV.UK, Set up as a sole trader: https://www.gov.uk/set-up-a-sole-trader
- GOV.UK, Self-employed National Insurance rates: https://www.gov.uk/self-employed-national-insurance-rates
- GOV.UK, Expenses if you're self-employed: https://www.gov.uk/expenses-if-youre-self-employed
- GOV.UK, Tax on your private pension contributions: annual allowance: https://www.gov.uk/tax-on-your-private-pension/annual-allowance
- GOV.UK, Individual Savings Accounts (ISAs): https://www.gov.uk/individual-savings-accounts