The single most important thing to understand
Self-employed tax is charged on your profit, not your turnover. Turnover is the total you invoice. Profit is what is left after you deduct your allowable business expenses. If you earned £40,000 and your allowable expenses were £8,000, you pay income tax on £32,000 — not £40,000.
This distinction matters enormously. New sole traders who do not understand it end up either over-saving for tax (not a disaster, but cash-inefficient) or under-saving (a real problem). Know your profit figure, not just your income.
Profit
What income tax is charged on
Income minus allowable expenses. Not turnover. Know the difference.
£1,000
Trading allowance — no tax below this
If your total self-employment income in a year is under £1,000, no registration or filing required.
150%
Budget this for your first year's tax bill
Payments on account mean your first January payment is 150% of what you owe for the year just finished.
5 October
Registration deadline
Register with HMRC by 5 October after the tax year you started trading. Register earlier — you need a UTR to file.
The trading allowance
If your total self-employment income in a tax year is under £1,000, you do not need to register with HMRC or file a Self Assessment return. The trading allowance covers it.
Once you exceed £1,000, you must register and declare all of your income. You cannot use the trading allowance and claim actual expenses in the same year — it is one or the other. For most active sole traders, claiming actual expenses will save more tax.
More detail at GOV.UK: https://www.gov.uk/guidance/tax-free-allowances-on-property-and-trading-income
Allowable expenses — what you can deduct
The test HMRC applies is whether an expense was incurred "wholly and exclusively for the purposes of the trade." Ask yourself: would you spend this money if you were not running the business? If the honest answer is no, it is a business expense.
Office costs: stationery, printer ink, envelopes, stamps, postage. If you buy a computer primarily for work, the full cost is usually deductible.
Travel: business journeys by car (see mileage rates below), train, bus, or taxi. Commuting does not count. Travel to a client site counts. Travel to a permanent place of work does not.
Staff costs: if you pay subcontractors or employ people, their wages and your employer NI contributions are deductible. Keep records of what you paid and what it was for.
Things you buy to sell on: stock, raw materials, goods.
Financial costs: bank charges, professional indemnity insurance, business insurance, accountancy fees.
Business premises: if you rent an office or workspace, the rent is deductible. If you work from home, see the home office section below.
If an expense is partly personal and partly business — a phone used for both, or a car with personal use — you can claim the business proportion only. Keep a reasonable basis for the split.
Home office expenses
Two methods are available. You use one or the other — not both.
Flat rate method: HMRC publishes a fixed monthly deduction based on the hours you work from home. Verify the current figures at GOV.UK: https://www.gov.uk/simpler-income-tax-simplified-expenses/working-from-home. Simple, no calculation required.
Actual proportion method: work out what proportion of your household bills relate to your business use, based on the number of rooms in your home and the hours you use one for work. Take your annual household costs (rent or mortgage interest, council tax, utilities, broadband), divide by the number of rooms, and apply the proportion of hours the work room is actually used for business. More accurate but significantly more paperwork.
For most sole traders, the flat rate is fine. The difference between methods is rarely large enough to justify the additional admin of the actual proportion approach.
Mileage
If you use your own vehicle for business travel, you can claim the HMRC approved mileage rate. For the first 10,000 business miles in a tax year, the rate is 45p per mile. Above 10,000 miles, it drops to 25p per mile. Verify the current approved rates at GOV.UK: https://www.gov.uk/expenses-and-benefits/business-travel-mileage
Keep a mileage log: date, purpose, destination, miles driven. Without a log, HMRC can disallow the claim entirely.
One important rule: if you claim the HMRC mileage rate, you cannot also claim capital allowances on the same vehicle. You choose one method and stick with it for that vehicle.
Payments on account — the biggest shock for first-time filers
When you file your first Self Assessment return, HMRC does not just collect the tax you owe for the year just finished. They also demand two advance payments toward next year's tax, each equal to 50% of your current year's bill.
The first payment on account is due in January at the same time as your current year's tax. The second is due the following July.
Here is what that means in practice. Say your first year's tax bill is £2,000. HMRC asks for £3,000 in January: £2,000 for last year, plus £1,000 as a deposit toward this year. Then another £1,000 in July.
Your second year's January bill will be £2,000 (or whatever this year's tax is) minus the £2,000 you already paid on account — so potentially nothing due in January if the estimates were accurate. But the first year is the one that catches people.
The practical rule: budget as if your first tax bill will be 150% of what you expect to owe. Put aside money from the very first payment you receive. Do not wait until January.
This is the detail GOV.UK covers but does not lead with. It is the number one reason sole traders get into difficulty with HMRC debt in their first year.
When to get an accountant
For very simple sole trader income — one income stream, clear expenses, turnover comfortably below the VAT threshold, no other complications — Self Assessment is manageable. The HMRC online system is functional and there are good guides available.
The situations where an accountant earns their fee: multiple income streams (especially if you also have employment income), property income, shares or investments with gains to report, IR35 risk, close to or over the VAT threshold, a partnership, or if you have received an HMRC enquiry.
A straightforward sole trader self-assessment return from a competent accountant typically costs £300 to £600 per year. For a complex return it will be more. In most cases, a good accountant saves more in missed expense claims and tax efficiency than they charge. They also take responsibility for the accuracy of what they file — which has value in itself.
Get a plain-English breakdown of self-employment tax — one email, no ongoing noise.
Common questions about self-employed tax
What counts as profit for self-employed tax purposes?▾
Profit is your total trading income minus your allowable business expenses. If you earned £50,000 and spent £10,000 on legitimate business expenses, your taxable profit is £40,000. You then pay income tax on profits above your personal allowance (verify the current personal allowance at GOV.UK — it can change) and National Insurance on profits above the lower profits limit.
Can I claim expenses I incurred before I officially registered?▾
Yes, in many cases. Pre-trading expenditure incurred in the seven years before you started trading can be deducted as if it were incurred on the first day of trading, provided the costs were wholly and exclusively for the business. This covers things like equipment purchased, website development costs, or professional fees paid before your first client.
What is the personal allowance for self-employed people?▾
The personal allowance applies to self-employed income in the same way it applies to employment income. You pay no income tax on profits below the personal allowance threshold. Verify the current figure at GOV.UK — it can change in each Budget: https://www.gov.uk/income-tax-rates
When do I have to pay my self-employed tax bill?▾
The payment deadline for Self Assessment is 31 January following the end of the tax year. The tax year ends on 5 April. So for the 2025/26 tax year (ending 5 April 2026), the payment deadline is 31 January 2027. A second payment on account toward the following year is due 31 July. Miss either deadline and interest and penalties start to accrue.
What happens if I cannot pay my tax bill?▾
Contact HMRC before the deadline, not after. HMRC offers a Time to Pay arrangement — a payment plan that spreads what you owe. You may be charged interest, but you avoid the late payment surcharges that kick in if HMRC has to chase you. You can set up a Time to Pay arrangement online via your HMRC account if you owe less than £30,000.
What if my income varies a lot year to year?▾
You can apply to reduce your payments on account if you expect your income to be lower this year than last. You do this on your Self Assessment return. If your estimate turns out to be too low, HMRC will charge interest on the shortfall — but there is no penalty for a genuine over-reduction. The key is not to reduce wildly without a reasonable basis.
Do I need to make payments on account in my first year?▾
Yes, if your tax bill for your first year exceeds £1,000 and less than 80% of your total tax liability was collected at source (e.g. via PAYE from a second job). In your first Self Assessment filing, HMRC calculates both what you owe for the year just finished and your two payments on account toward the next year. This is why budgeting 150% of your expected bill in year one is the right approach.