How much income tax will I pay as a sole trader?

If you are a sole trader, you are responsible for reporting your business income to HMRC and paying any Income Tax and National Insurance due on your profits. Depending on your income and circumstances, you may need to comply with Making Tax Digital (MTD) for Income Tax, which requires digital record-keeping and regular submissions to HMRC.

This article explains how Income Tax is calculated, how the self-assessment process works and what you need to know about payments on account.

How much Income Tax will I pay as a sole trader?

As a sole trader, you normally pay Income Tax on your taxable profits through the Self Assessment system.

The amount of Income Tax you pay depends on:

your taxable profits
any other income you receive during the tax year
the Income Tax rates and allowances that apply for the tax year
where you live in the UK, as Scottish taxpayers may be subject to different Income Tax rates and bands

Most taxpayers are entitled to a Personal Allowance, although this may be reduced if your income exceeds certain thresholds.

Sole traders generally pay Income Tax at the same rates as other individual taxpayers. Income Tax is charged at different rates depending on the amount of taxable income you receive.

In addition to Income Tax, sole traders may also need to pay National Insurance contributions depending on their profit levels.

If you have income from other sources, such as employment, property or investments, this may affect the amount of tax you pay.

Making Tax Digital for Income Tax

HMRC is introducing Making Tax Digital (MTD) for Income Tax in stages. If MTD applies to you, you will need to keep digital business records and use compatible software to submit information to HMRC.

Although you will still need to calculate and pay Income Tax on your profits, the way you keep records and report information to HMRC may differ from the traditional annual Self Assessment process.

You should check HMRC’s guidance to find out whether MTD applies to you and when you may need to comply.

Rakesh buys and sells items online as a sole trader and is entitled to the full personal allowance .

His annual taxable profits for the tax year 2026/27 are £19,000 and his taxable income is £6,430 (£19,000 – personal allowance of £12,570)

For this tax year, up to £37,699 of taxable income above the personal allowance, is taxed at the basic rate of 20%. As £6,430 is less than £37,699 Rakesh will pay income tax of £1,286 (£6,430 × 20%).

Rakesh may also need to pay National Insurance contributions.
Sandra is a self-employed electrician who is entitled to the full personal allowance

Sandra’s taxable profits for the 2026/27 tax year are £65,000 and her taxable income is £52,430 (£65,000 less the Personal Allowance of £12,570).

For this tax year, £37,700 of taxable income is taxed at the basic rate of 20%. As Sandra’s taxable income exceeds £37,700, the first £37,700 will be taxed at 20% and the remaining £14,730 (£52,430 – £37,700) will be taxed at the higher rate of 40%.

Sandra’s Income Tax liability will therefore be £13,432 ((£37,700 × 20%) + (£14,730 × 40%))

Sandra may also need to pay National Insurance contributions, depending on her profit level and personal circumstances and is likely to have to submit quarterly updates throughout the tax year in accordance with MTD.

How is my profit calculated?

Your taxable profit is usually calculated by taking your business income and deducting any allowable business expenses:

Business income − allowable business expenses = taxable profit

Business income includes the money your business receives from selling goods or providing services. Allowable expenses are costs that are incurred wholly and exclusively for business purposes, such as office costs, travel expenses and certain professional fees.

In some cases, an expense may be included in your accounts but may not be fully allowable for tax purposes. As a result, your taxable profit may differ from the profit shown in your accounts.

Keeping accurate records throughout the year will help you calculate your profit correctly and support any figures reported to HMRC.

If Making Tax Digital (MTD) for Income Tax applies to you, you will need to keep digital records and use compatible software to submit information to HMRC.

If you are unsure whether an expense is allowable or how to calculate your taxable profit, you should check HMRC’s guidance or seek professional advice.

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When do I need to report my profit?

Sole traders are generally taxed on the profits that arise during the tax year, which runs from 6 April to 5 April.

Since April 2024, calculating taxable profits using the cash basis became the default method for most sole traders, although it is still possible to choose traditional accounting methods if you are eligible instead.

HMRC encourages sole traders to prepare their accounts to 31 March or 5 April, as this aligns closely with the tax year and can make tax reporting simpler.

If you need to comply with MTD for Income Tax, you will need to keep digital records and submit quarterly updates to HMRC using compatible software, followed by an end-of-year finalisation process.

If your business makes losses, changes accounting dates or ceases trading, special tax rules may apply and professional advice may be helpful.

When do I need to pay Income Tax?

If you are a sole trader, any Income Tax due is normally payable by 31 January following the end of the tax year.

You may also be required to make payments on account, which are advance payments towards your next tax bill. Payments on account are usually required where a significant proportion of your tax is not collected at source, for example through PAYE.

Payments on account are normally made in two instalments:

the first payment is due on 31 January
the second payment is due on 31 July

Each payment is usually equal to half of your previous year’s Income Tax liability.

Once your actual tax liability for the year has been calculated, any payments on account you have already made are deducted from the amount due. If you have paid too much, you may be entitled to a refund. If you have paid too little, you will need to pay the balance to HMRC.

If Making Tax Digital (MTD) for Income Tax applies to you, you will need to keep digital records and submit quarterly updates to HMRC using compatible software. However, MTD does not change the way Income Tax is calculated and does not currently replace the requirement to pay tax by the relevant deadlines.

Keeping accurate records throughout the year and setting aside money for tax can help you avoid unexpected tax bills and ensure you have sufficient funds available when payments become due.

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