Understanding Your Self-Employment Tax

How Self-Employment Tax Works

The basic formula is straightforward: your total income minus your allowable expenses equals your taxable profit. You pay income tax and National Insurance on that profit.

For example, if you earned £40,000 and had £8,000 in allowable expenses, your taxable profit would be £32,000.

Income Tax Bands (2026/27)

Everyone gets a tax-free Personal Allowance of £12,570. After that, your profit is taxed in bands:

These are the England, Wales, and Northern Ireland rates. Scotland has its own income tax bands.

National Insurance

As a self-employed person, you may pay two types of National Insurance:

Class 2 NI has been abolished from the 2026/27 tax year. You no longer need to pay it.

Class 4 NI — calculated on your profits:

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

Allowable Expenses

You can deduct legitimate business expenses from your income before calculating tax. Common categories include:

• Office costs — stationery, phone bills, software subscriptions
• Travel — fuel, parking, public transport for business journeys
• Stock and materials — raw materials, goods for resale
• Professional services — accountancy fees, legal costs
• Marketing — website hosting, advertising, business cards
• Clothing — uniforms and protective equipment (not everyday clothing)
• Working from home — you can claim a flat rate of £6 per week without evidence, or calculate the actual proportion of household costs
• Insurance — professional indemnity, public liability

Alternatively, if your expenses are low, you can use the Trading Allowance of £1,000 — a flat deduction instead of claiming individual expenses.

Mileage and Travel

If you use your own vehicle for business, you can claim HMRC approved mileage rates instead of actual running costs:

• Cars and vans — 45p per mile for the first 10,000 miles, then 25p per mile thereafter
• Motorcycles — 24p per mile

Keep a log of each business journey — date, destination, purpose, and miles driven. Vecti can track this automatically using GPS.

CIS Deductions

If you work in the construction industry, your contractor may deduct tax from your payments under the Construction Industry Scheme (CIS). These deductions count as tax already paid and reduce your final tax bill. In many cases, CIS subcontractors receive a refund at the end of the year.

For more detail, see our CIS Explained guide.

Advance Tax Payments

If your tax bill is over £1,000, HMRC may ask you to make advance tax payments (HMRC calls these “payments on account”). These are payments towards next year’s tax bill, each equal to half of your previous year’s liability.

• First payment — due 31 January (during the tax year)
• Second payment — due 31 July (after the tax year ends)

Any difference between the advance payments and your actual liability is settled when you file your return.