- You are taxed on profit (income minus allowable expenses), not turnover.
- Income tax is 20%, 40% and 45% on the usual bands after the £12,570 personal allowance.
- Class 4 NI is 6% between £12,570 and £50,270, then 2% above.
- Class 2 NI is no longer charged, but you still build state pension entitlement above the small profits threshold.
- Set aside roughly 20% to 30% of profit for the bill, more once you cross into higher rate.
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How sole trader tax works
You pay tax on your profit, which is your business income minus allowable expenses, not your total takings. The first £12,570 is covered by the personal allowance. Above that, income tax is 20% to £50,270, 40% to £125,140, and 45% beyond, the same bands as employees (outside Scotland).
Knowing which expenses you can claim is where many sole traders leave money on the table, covered in our self-employed allowances guide.
Class 2 and Class 4 National Insurance
Two types of NI apply to the self-employed, though one has effectively gone:
- Class 4: 6% on profits between £12,570 and £50,270, then 2% above. This is the main self-employed NI charge.
- Class 2: no longer payable from 2024/25 onwards. If your profits are above the small profits threshold (£6,725) you are treated as having paid it, so you keep building state pension entitlement without a charge.
If your profits are below £6,725 you can pay Class 2 voluntarily to protect your state pension record.
How much to set aside
A common mistake is spending the full profit and being caught short at the January deadline. As a rough guide, set aside around 20% to 30% of your profit while you are a basic-rate taxpayer, rising sharply once profit crosses £50,270 into higher rate. Add Payments on Account, where HMRC asks for half of next year's expected bill on top of this year's, and the first year's demand can be a shock.
Take Home forecasts the bill across the year as your income lands, so the number is never a surprise.