How to Calculate Your Tax Bill as a Sole Trader

One of the most common questions new sole traders ask is: "How much tax will I actually pay?" The answer depends on your profit, but the calculation itself follows a clear set of steps. Once you understand the formula, you can plan ahead, set aside the right amount each month, and avoid any nasty surprises in January.

This guide walks through the exact calculation for the 2025/26 tax year using a realistic worked example with real numbers.

The Formula at a Glance

The basic steps are:

1. Add up all your business income.
2. Subtract your allowable business expenses to get your taxable profit.
3. Subtract your Personal Allowance.
4. Apply Income Tax bands to the remaining amount.
5. Calculate Class 2 National Insurance.
6. Calculate Class 4 National Insurance.
7. Add Income Tax, Class 2 NI, and Class 4 NI together.

That total is your tax bill. Let us work through each step with a concrete example.

Step 1: Calculate Your Total Income

Suppose you are a self-employed graphic designer. During the 2025/26 tax year (6 April 2025 to 5 April 2026) you invoice clients a total of £55,000. That is your gross income.

If you also have employment income, savings income, or dividend income, those are taxed separately under their own rules. For this example, we will assume self-employment is your only source of income.

Step 2: Subtract Allowable Expenses

You incurred the following business expenses during the year:

• Software subscriptions: £1,200
• Computer equipment: £1,500
• Office supplies: £300
• Travel: £800
• Professional indemnity insurance: £400
• Accountancy fees: £600
• Marketing and advertising: £700
• Working from home (simplified expenses): £1,350 (using the flat rate of £26/month for 25+ hours)
• Phone and broadband (business proportion): £350

Total allowable expenses: £7,200

Your taxable profit is £55,000 minus £7,200, giving you £47,800.

Step 3: Subtract the Personal Allowance

For 2025/26, the Personal Allowance is £12,570. This is the amount of income you can earn before paying any Income Tax.

£47,800 minus £12,570 = £35,230 of taxable income.

Note: If your total income exceeds £100,000, your Personal Allowance is reduced by £1 for every £2 over that threshold. It disappears entirely at £125,140. In our example, this does not apply.

Step 4: Apply the Income Tax Bands

The Income Tax bands for 2025/26 are:

| Band | Taxable income | Rate | |------|---------------|------| | Basic rate | £0 to £37,700 | 20% | | Higher rate | £37,701 to £125,140 | 40% | | Additional rate | Over £125,140 | 45% |

Our taxable income of £35,230 falls entirely within the basic rate band.

Income Tax = £35,230 x 20% = £7,046.00

What If You Earned More?

If your taxable income were £50,000, the calculation would be:

• First £37,700 at 20% = £7,540.00
• Remaining £12,300 at 40% = £4,920.00
• Total Income Tax = £12,460.00

The higher rate only applies to the portion above £37,700, not to your entire income.

Step 5: Calculate Class 2 National Insurance

Class 2 NI is a flat weekly contribution that gives you access to the State Pension and certain benefits. For 2025/26:

• Rate: £3.45 per week
• Small Profits Threshold: £6,725 per year

If your profits are above the Small Profits Threshold, you pay Class 2 NI. If your profits are below it, you do not have to pay, but you can choose to pay voluntarily to protect your State Pension entitlement.

Our profit of £47,800 is well above the threshold.

Class 2 NI = £3.45 x 52 weeks = £179.40

Class 2 NI is collected through your Self Assessment tax return, not separately.

Step 6: Calculate Class 4 National Insurance

Class 4 NI is the main National Insurance charge for self-employed people. For 2025/26:

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

Our profit is £47,800.

The amount between £12,570 and £47,800 is £35,230.

Class 4 NI = £35,230 x 6% = £2,113.80

Since our profit does not exceed £50,270, the 2% rate does not apply in this example.

If Your Profit Were Higher

If your profit were £60,000:

• £50,270 minus £12,570 = £37,700 at 6% = £2,262.00
• £60,000 minus £50,270 = £9,730 at 2% = £194.60
• Total Class 4 NI = £2,456.60

Step 7: Add It All Together

Now we can calculate the total tax bill for our graphic designer with £47,800 profit:

| Component | Amount | |-----------|--------| | Income Tax | £7,046.00 | | Class 2 NI | £179.40 | | Class 4 NI | £2,113.80 | | Total tax bill | £9,339.20 |

That works out to roughly 19.5% of profit — the effective tax rate. This is a useful number to know because it tells you that for every pound of profit you earn, you keep about 80p.

Payments on Account

If your tax bill is over £1,000 and less than 80% of your tax was collected at source (which is the case for most sole traders), HMRC will ask you to make payments on account. These are advance payments towards next year's tax bill, each equal to 50% of the current year's liability.

In our example, you would pay:

• 31 January 2027: £9,339.20 (the full 2025/26 bill) plus £4,669.60 (first payment on account for 2026/27) = £14,008.80
• 31 July 2027: £4,669.60 (second payment on account for 2026/27)

This is why many sole traders get a shock with their first tax bill — you are effectively paying 18 months of tax at once. Planning ahead is essential.

How to Set Money Aside

A common rule of thumb is to set aside 25-30% of your profit each month for tax. Based on our example, the effective rate of 19.5% suggests 25% gives you a comfortable buffer that accounts for payments on account.

Open a separate savings account, transfer the money each month, and do not touch it. When January comes around, the money is there and ready.

Common Mistakes to Avoid

Forgetting to Claim All Your Expenses

Every legitimate expense you miss increases your taxable profit. Keep records of everything. Software like Accounted can categorise expenses automatically as they appear in your bank feed, so nothing slips through the cracks.

Confusing Turnover with Profit

Your tax bill is based on profit, not on the total amount clients pay you. Always subtract your allowable expenses first.

Missing the Payment Deadline

Interest and penalties start immediately if you miss the 31 January or 31 July deadlines. Set calendar reminders well in advance.

Not Accounting for Student Loan Repayments

If you have a student loan, repayments are collected through Self Assessment when you are self-employed. Plan 2 borrowers pay 9% on income above £27,295 for 2025/26. This is on top of your tax and NI.

Let Accounted Do the Maths

Working through this calculation by hand every year is tedious and error-prone. Accounted's AI bookkeeper, Penny, tracks your income and expenses throughout the year, calculates your estimated tax liability in real time, and shows you exactly how much to set aside each month. No spreadsheets, no guesswork.

Start your free trial of Accounted today and see your estimated tax bill update automatically as you earn — so you always know exactly where you stand.

Related Reading

• How to Start a Beauty or Hair Business in the UK
• Tax Guide for Tutors and Private Teachers

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