£25,000 Self-Employed Tax

Guide

What Tax Do You Pay as Self-Employed? A Plain English Guide for 2025/26

Going self-employed is exciting. Understanding what HMRC will take from your earnings is less exciting — but it's one of the most important things to get your head around before you hand in your notice.

The good news is it's simpler than it looks. This guide explains exactly what taxes you'll pay as a sole trader in 2025/26, how they're calculated, and what you'll actually keep.

The Big Difference from Being Employed

When you're employed, your employer handles your tax through PAYE. It comes out of your wages automatically and you never have to think about it.

When you're self-employed, none of that happens. HMRC doesn't take tax from your income as you earn it — you receive everything upfront, then pay what you owe once a year through Self Assessment. This means you need to set money aside as you go, because the bill will come eventually.

Most self-employed people put aside around 25–30% of their income for tax. It's a rough rule of thumb but it stops you getting a nasty surprise in January.

What Taxes Do Self-Employed People Pay?

As a sole trader you pay two things:

Income tax — the same as employees, on your profits above £12,570.

Class 4 National Insurance — the NI charge for self-employed people, calculated on your annual profits.

Notice what's missing: you don't pay employee NI (Class 1), which is what employed people pay. The self-employed NI rates are lower overall, which is one of the financial advantages of working for yourself.

Income Tax: How It Works

Income tax works the same way whether you're employed or self-employed. You pay nothing on the first £12,570 of profit (the personal allowance), then pay on the rest in bands:

The key word here is profit, not income. If you earn £50,000 but spend £10,000 on legitimate business expenses, you're only taxed on £40,000. This is one of the most important things to understand as a self-employed person — expenses reduce your tax bill.

Class 4 National Insurance

Class 4 NI is calculated on your annual profits. For 2025/26:

• 0% on profits up to £12,570
• 6% on profits between £12,570 and £50,270
• 2% on profits above £50,270

These rates are lower than employee NI (which is 8% and 2%), which is part of why self-employed take-home pay can compare favourably to PAYE at similar income levels — though you do lose out on some employment benefits in return.

Class 4 NI is paid through your Self Assessment tax return, alongside your income tax.

What Happened to Class 2 National Insurance?

Class 2 NI was abolished from 6 April 2024. Previously, self-employed people paid a flat weekly charge (£3.45/week in 2023/24) through Self Assessment. This no longer applies.

If your profits are above £6,845, you automatically receive National Insurance credits that count towards your State Pension and certain benefits — you don't need to do anything or pay anything extra to protect your entitlement. If your profits are below £6,845, you can still pay voluntary Class 3 NI contributions to fill gaps in your State Pension record.

A Worked Example: £40,000 Profit

Let's say you're a freelance designer who made £40,000 profit last year (after expenses). Here's what you'd owe:

Income tax:

• Personal allowance: £12,570 at 0% = £0
• Remaining £27,430 at 20% = £5,486

Class 4 NI:

• £27,430 at 6% = £1,646

Total tax and NI: £7,132 Annual take-home: £32,868 Monthly take-home: £2,739

Your effective tax rate on £40,000 is 17.8% — lower than a PAYE employee on the same income because of the lower NI rates.

Business Expenses: The Tax Reducer You Shouldn't Ignore

As a sole trader, you can deduct legitimate business expenses from your income before tax is calculated. This reduces your profit figure, which reduces your tax bill.

Common allowable expenses include:

• Equipment and tools used for your work
• A portion of your home costs if you work from home (heating, broadband, electricity)
• Travel costs — mileage, train tickets, parking (but not regular commuting)
• Professional subscriptions and memberships
• Accountancy fees
• Marketing and advertising costs
• Business insurance

If you spend £5,000 on genuine business expenses on a £40,000 income, your taxable profit drops to £35,000 — saving you around £1,300 in tax. Keeping good records of your expenses is one of the simplest ways to reduce your bill legitimately.

Self Assessment: When and How You Pay

Unlike PAYE, your tax isn't collected automatically. You need to:

1. Register as self-employed with HMRC (if you haven't already)
2. Complete a Self Assessment tax return each year by 31 January
3. Pay the tax you owe by 31 January

The tax year runs from 6 April to 5 April. So for the 2025/26 tax year (6 April 2025 to 5 April 2026), your return is due by 31 January 2027 and payment is due on the same date.

Payments on account — once your tax bill exceeds £1,000, HMRC asks you to make advance payments towards next year's bill. These are due in January and July each year and are based on half of your previous year's bill. This catches a lot of new self-employed people off guard in their second year, so it's worth being aware of early.

Should You Become VAT Registered?

You must register for VAT if your taxable turnover exceeds £90,000 in a 12-month period. Below that threshold, it's optional.

If your clients are VAT-registered businesses, registering voluntarily can actually be beneficial — you can reclaim VAT on your purchases, and your clients can reclaim the VAT you charge them. If your clients are mostly individuals or small businesses who can't reclaim VAT, it makes your services appear 13.3% more expensive, which is a disadvantage.

This is one of those decisions worth discussing with an accountant when you get close to the threshold.

Frequently Asked Questions

Disclaimer: Wagewell provides estimates based on standard UK tax rates and is intended for general guidance only. Results may not reflect your exact tax position. Always consult a qualified accountant for personalised advice.