Sole Trader Tax Calculator 2026-27

Sole trader profits are taxed as personal income through the Self Assessment system. Your taxable profit is calculated as total business income minus allowable business expenses (materials, travel, insurance, professional fees, a proportion of home costs if you work from home, and capital allowances on equipment). This net profit is added to any other income you have to work out your total taxable income for the year. The calculator takes your turnover and expenses and assumes the business is your only income, so if you also have a salary, pension or rental income your real bill will be higher.

Income Tax is charged in bands after deducting the £12,570 Personal Allowance: 20% basic rate on income from £12,571 to £50,270, 40% higher rate from £50,271 to £125,140, and 45% additional rate above £125,140. The Personal Allowance reduces by £1 for every £2 earned above £100,000, creating an effective 60% marginal rate between £100,000 and £125,140. Tax is paid in two Payments on Account (January and July) plus a balancing payment in the following January, so the first year of trading often produces a larger bill than people expect.

National Insurance adds a further layer. Mandatory Class 2 contributions, a flat £3.45 a week once profits passed £12,570, were abolished from 6 April 2024, and profits at or above the Small Profits Threshold of £7,105 are now treated as paid for State Pension purposes without any charge. Voluntary Class 2, at £3.65 a week in 2026/27, is still available if your profits are below that threshold and you want to protect your State Pension record. Class 4 contributions are 6% on profits between £12,570 and £50,270, then 2% on profits above £50,270, and they are collected through Self Assessment alongside the income tax. For most self-employed people the end of compulsory Class 2 saved £179.40 a year, a rare simplification of UK tax.

Before any of this applies you need to be registered. Register as self-employed with HMRC by 5 October following the tax year in which you start trading. Missing that deadline can bring a failure-to-notify penalty worked out as a percentage of the tax left unpaid, up to 30% where the failure was not deliberate and reduced if you tell HMRC yourself, down to nil for an unprompted disclosure within 12 months, plus interest on the late tax. HMRC then issues a Unique Taxpayer Reference (UTR), which you need in order to file Self Assessment. Making Tax Digital for Income Tax has applied since 6 April 2026 to sole traders and landlords whose self-employment and property turnover together came to more than £50,000 in 2024/25: they keep digital records, send quarterly updates through compatible software and then submit a final declaration. The threshold falls to £30,000 from April 2027 and £20,000 from April 2028. You also choose an accounting method. Since 6 April 2024 the cash basis, which records income when it is actually paid, is the default for sole traders whatever their turnover, and the accruals basis, which records income when it is invoiced, is something you opt into.

Allowable expenses are what turn turnover into taxable profit, so they deserve care. You can claim office costs (rent, business rates, stationery, phone), travel at the HMRC mileage rates of 55p and 25p plus train fares and parking, but never the regular commute. Clothing counts only if it is a uniform, and entertainment only if it is for clients. Staff costs, stock you buy to sell, insurance, bank charges, business premises rates and utilities, and marketing all qualify. Working from home can be claimed at the simplified HMRC flat rate of £10, £18 or £26 a month, depending on hours worked at home, or as an actual proportion of household bills based on the rooms used and the time spent.

The £1,000 trading allowance is an alternative to claiming actual expenses. If your gross trading income is under £1,000 a year you do not need to register with HMRC at all, because the allowance covers it. Above £1,000 you can deduct either your actual expenses or the flat £1,000 allowance, whichever is bigger, but not both, and there is no upper turnover limit on using it, which makes it useful for casual side hustles and online selling with few costs. Above £90k of turnover you must register for VAT regardless of how much profit you make.