Self-employed tax return: what sole traders actually owe
Going self-employed means you're suddenly responsible for working out your own tax, instead of it being deducted automatically through PAYE. Here's what's actually being calculated, and why the first bill often surprises people.
Income Tax on self-employed profit
Self-employed Income Tax uses the same bands and Personal Allowance as employees — the difference is what it's calculated on. Rather than tax being deducted from your gross pay automatically, you calculate tax on your profit: total business income minus allowable business expenses, reported through Self Assessment.
Class 2 and Class 4 National Insurance
Self-employed NI works differently from employee NI. Class 2 is a smaller, largely flat-rate contribution that helps build entitlement to the State Pension and certain benefits, paid once profit passes a lower threshold. Class 4 is calculated as a percentage of profit above a separate, higher threshold, similar in spirit to employee NI but calculated annually through Self Assessment rather than deducted per payslip.
What counts as an allowable expense
Allowable expenses are costs "wholly and exclusively" for the business — things like stock, business travel, a proportion of home-working costs, professional fees and equipment. Getting this right matters because it directly reduces the profit figure your tax is calculated on; claiming too little means overpaying tax, and claiming ineligible costs risks a compliance check.
The Self Assessment online filing and payment deadline is 31 January following the end of the tax year — miss it and an automatic penalty applies even if you owe no further tax.
Why your first bill can be bigger than expected: payments on account
Once your tax bill passes a certain threshold, HMRC usually requires "payments on account" — advance payments toward next year's tax bill, paid alongside your current bill, each equal to roughly half of what you owed. This means your first Self Assessment payment can be around one and a half times your actual tax bill for the year, which regularly catches new sole traders off guard if they haven't budgeted for it.
A quick note
Tax bands, thresholds and NI rates are reviewed each tax year — always check current gov.uk figures or speak to an accountant before filing. See our full disclaimer.