Tax and NI
Sole trader tax: how your profit is taxed
A sole trader and the business are one taxpayer, so the profit lands on your own return whether you spend it or leave it in the account.
A sole trader with £35,000 of profit in 2026/27 pays £4,486 of Income Tax and £1,346 of Class 4 National Insurance in England, Wales or Northern Ireland, £5,832 in total, which is 16.7 % of the profit. The tax is worked out on profit, meaning sales minus allowable expenses, and never on the money you transfer to your personal account: those transfers, called drawings, are neither an expense nor taxable income. Profit is added to any wages, pension or rent you have, the Personal Allowance of £12,570 comes off once, and the rest is taxed in bands. Class 4 is charged on the trading profit alone, at 6 % from £12,570 to £50,270 and 2 % above. You report the year on a Self Assessment return and pay by 31 January 2028, with payments on account towards the following year once the bill reaches £1,000.
Sole trader tax on your profit, 2026/27
You keep
£29,168
| Income Tax | £4,486 |
| Class 4 National Insurance | £1,346 |
| Put aside | 16.7 % of profit |
Figures checked by Radif Partners · Editorial policy · How we calculate
One person, one taxpayer
Setting up as a sole trader creates no new legal person. GOV.UK calls it the simplest business structure: you work for yourself, you are classed as self-employed and you take every decision (GOV.UK, set up as a sole trader). The trading name on your van or your website is only a label. For tax purposes the plumber, the illustrator and the dog walker are individuals with a trade, and the trade’s profit is part of their own income for the year.
The same fact explains the main legal drawback. Sole traders have unlimited liability, so the debts of the business are your debts. A customer who sues, a supplier left unpaid or a loan you signed for the business can all reach your personal assets. That is a matter of law rather than tax, but it is the first thing people weigh when they set this structure against a company.
Profit, not drawings
New sole traders often assume they will be taxed on what they “pay themselves”. They will not. HMRC looks at the profit of the tax year: what the business earned, less the allowable expenses of earning it. Money moved from the business account to your personal account is a drawing, and drawings change nothing. GOV.UK puts it in one line on its expenses guide: allowable expenses do not include money taken from your business for personal use (GOV.UK, expenses if you are self-employed).
Two consequences follow. A designer who leaves £10,000 in the business account at the end of the year is still taxed on it, because it is profit. A driver who draws more than the profit in a quiet year, living partly on last year’s savings, pays no extra tax for doing so. The bill moves with profit alone, which is why a projection of profit is the only figure you need to estimate it.
Expenses are where the bill can legitimately shrink. A cost incurred for the business, such as stock, fuel for business journeys, insurance or a trade subscription, comes off sales before tax. Starting from £35,000 of profit, a further £4,000 of genuine expenses brings the bill down from £5,832 to £4,792. The allowable expenses guide lists what HMRC accepts, and very small traders can use the trading allowance of £1,000 instead of real costs.
The parts of a sole trader’s bill
Income Tax
Profit is added to your other taxable income. The Personal Allowance of £12,570 comes off first; in England, Wales and Northern Ireland the next slice is taxed at 20 % up to £50,270 of income, then 40 %, and 45 % above £125,140 (GOV.UK, Income Tax rates). From £100,000 the allowance shrinks, and it has gone entirely at £125,140. Scottish taxpayers apply their own six bands to the same profit, set out on the Scotland page.
Class 4 National Insurance
Class 4 is charged on trading profit only, never on wages or rent: 6 % between £12,570 and £50,270, 2 % on anything above (GOV.UK, self-employed National Insurance rates). It is collected with Income Tax through Self Assessment. Class 2 is no longer charged: with profit of £7,105 or more it is treated as paid, so the year counts towards your State Pension at no cost. The Class 4 page and the Class 2 guide go through each one.
Student loan repayments
If you have a student loan, HMRC adds the year’s repayment to your Self Assessment bill. On £35,000 of profit, a Plan 2 borrower repays £505 on top of tax and Class 4, which takes the bill to £6,337. Thresholds by plan are on the student loan page.
Payments on account
These are not a tax of their own but an advance on next year’s. Once your Income Tax and Class 4 through Self Assessment reach £1,000, HMRC asks for half of that figure on 31 January and half on 31 July. In the first year this makes January heavy, as the payments on account page shows.
What different profits cost
The table runs the same engine as the calculator above for five profits, with no other income and no student loan, for someone living in England, Wales or Northern Ireland.
| Profit | Income Tax | Class 4 | Total | Share of profit |
|---|---|---|---|---|
| £15,000 | £486 | £146 | £632 | 4.2 % |
| £25,000 | £2,486 | £746 | £3,232 | 12.9 % |
| £35,000 | £4,486 | £1,346 | £5,832 | 16.7 % |
| £50,000 | £7,486 | £2,246 | £9,732 | 19.5 % |
| £70,000 | £15,432 | £2,657 | £18,089 | 25.8 % |
The share climbs with profit because more of it sits in higher bands, yet it stays far below the headline rates: even at £70,000 the bill is well under a third of the profit, since the first £12,570 is untaxed and the basic band is wide.
When the tax is paid
The tax year runs from 6 April 2026 to 5 April 2027. For 2026/27, a newcomer registers by 5 October 2027, files online by 31 January 2028 and pays on the same day (GOV.UK, Self Assessment deadlines). A paper return is due by 31 October 2027. Nothing is deducted from your invoices along the way, and that is the real difference from a job: the money sits with you until January, so the tax to put aside calculator turns the expected bill into a share of each payment you receive.
Records HMRC expects
From the first day of trading you must keep records that let you work out profit or loss: sales invoices or a log of takings, receipts for expenses, bank statements and any mileage log. HMRC can charge a penalty if records are inaccurate or incomplete, and it can ask to see them well after the return has gone in. Under Making Tax Digital, sole traders whose turnover was above £50,000 keep those records in compatible software from 6 April 2026, and the test falls to £30,000 for a start on 6 April 2027. The Making Tax Digital checker gives your own start date.
VAT is separate from Income Tax: you must register once taxable turnover passes £90,000 over a rolling twelve months, as the VAT threshold page explains. Employing staff brings payroll and employer National Insurance. Neither changes how your own profit is taxed.
When people look at a company instead
As profit grows, the question of a limited company comes up. A company pays Corporation Tax on its profit and you then pay tax on the salary and dividends you take out, which is a different set of rules rather than a lower rate. The sole trader or limited company comparison sets both side by side for any profit, with the costs and duties a company adds. For many one-person businesses at modest profit levels the sole trader route remains the simpler of the two.