How self-employed tax works in 2025/26
As a sole trader you are taxed on your profit — your income minus allowable business expenses. For example, on £50,000 of profit you'd pay income tax and Class 4 National Insurance, leaving roughly £40,268 take-home. You keep about 81% of your income at that level.
Two deductions apply: income tax at 20% above the £12,570 personal allowance (40% above £50,270, 45% above £125,140), and Class 4 National Insurance at 6% between £12,570 and £50,270, then 2% on profit above that. Unlike an employee, you have no employer National Insurance and no PAYE — you report and pay through Self Assessment.
Contracting through a limited company instead? Compare your options with our inside vs outside IR35 calculator.
Frequently asked questions
How is sole trader take-home pay calculated?
Your profit is your income minus allowable business expenses. You then pay income tax (20%, 40% or 45% by band after the £12,570 personal allowance) and Class 4 National Insurance (6% between £12,570 and £50,270, then 2% above) on that profit. What remains is your take-home.
Do sole traders pay National Insurance?
Yes — Class 4 National Insurance on profits above £12,570. Class 2 National Insurance is no longer payable for most self-employed people from 2024/25, though it can still be paid voluntarily to protect benefit entitlement.
Is being a sole trader better than a limited company?
It depends on your profit level. Sole trader is simpler with less admin, but at higher profits a limited company with salary and dividends is often more tax-efficient. Compare your situation and take advice before deciding.