Self-Employment Income Guide

Written for new UK sole traders who need to understand what they actually owe HMRC. The central idea is simple but routinely missed: you are taxed on profit, not on the money that comes through the door. This guide covers how to get from turnover to taxable profit and what falls due. It is the foundation; for legal ways to reduce that bill (pensions, timing, allowances), see the self-employed tax planning guide.

Turnover is not profit

Turnover is everything you invoiced for. Profit is turnover minus the expenses HMRC lets you deduct. A consultant billing £60,000 but spending only £5,000 has a very different tax bill from an online seller billing £30,000 with £15,000 of stock and postage costs — both have £15,000 of taxable profit in the second case but £55,000 in the first. Confusing the two is the most common reason new sole traders underestimate their January bill.

What counts as an allowable expense

HMRC lets you deduct costs incurred wholly and exclusively for the trade. Typical allowable expenses include:

• Office costs — stationery, software subscriptions, phone and broadband (business proportion).
• Travel — fuel, parking, train fares and hotels for business trips. Ordinary commuting to a regular workplace is not allowable.
• Equipment — laptops, tools and machinery, either expensed outright or through capital allowances.
• Home office — a proportion of heat, light, power and a dedicated workspace, or the simplified flat-rate.
• Professional fees — accountant, business insurance, relevant professional subscriptions.

Full lists are at GOV.UK: Self-employed expenses.

Worked example: £40,000 turnover

A graphic designer bills £40,000 and has £5,000 of allowable expenses (software, a new laptop, business travel, home-office proportion).

• Net profit: £35,000
• Income Tax: £12,570 tax-free, then 20% on £22,430 = £4,486
• Class 4 NI: 6% on profit between £12,570 and £50,270 = £1,346
• Class 2 NI has been abolished — no flat weekly charge applies.
• Total tax and NI: ≈ £5,832
• Income after tax: ≈ £29,168

Model your own figures with the UK Self-Employed Tax Calculator.

When you must register for VAT

If your taxable turnover exceeds £90,000 in any rolling 12-month period you must register for VAT, charge it on your invoices and submit returns. You can register voluntarily below that if it suits your customers. See GOV.UK: VAT registration.

Key deadlines

• Register for Self Assessment: by 5 October after the tax year you became self-employed.
• File and pay online: by 31 January after the end of the tax year.
• Payments on account: if your bill is over £1,000, HMRC collects advance payments each January and July — your first bill can therefore be around 150% of what you expected.

Limitations

This covers sole traders only. Limited company directors face Corporation Tax, salary-plus-dividend tax, and different NI rules — the figures above do not apply. Capital allowances and complex depreciation need an accountant. Figures use 2026/27 rates, which change each Budget.