10 min read
Running your own business is exciting. You get to set your own hours, choose your clients, and build something you care about. But with that freedom comes a little less glamorous side: dealing with tax.
If you’re self-employed, a sole trader, or even running your own limited company, it can feel overwhelming at first. What exactly do you need to pay tax on? How do National Insurance contributions work? And what about all those allowances everyone talks about?
The good news is that once you get familiar with how tax works, it feels much less intimidating, and it can even help you keep more of what you earn. Let’s walk through what you need to know, so you can focus on what you love about your business, not just the paperwork.
What actually counts as income?
When HMRC talks about “income,” they mean a lot more than just what lands in your bank account from clients.
If you’re self-employed or a sole trader, your taxable income can include:
- Your business profits (what’s left after allowable expenses)
- Rental income from property you let out
- Savings interest (if it’s above certain thresholds)
- Dividends, if you also run a limited company or own shares
- Some pensions and state benefits
The big thing to remember is you pay tax on your profits, not your total turnover. That’s why keeping track of your business expenses is so important — they help reduce your tax bill.
The UK tax year & your Personal Allowance
In the UK, the tax year runs from 6 April to 5 April the following year.
For the 2025–26 tax year, most people get a Personal Allowance of £12,570. That’s the amount you can earn before paying any income tax.
However, if your income is more than £100,000, your Personal Allowance reduces by £1 for every £2 over the threshold. It disappears entirely if your income hits £125,140 or more.
Knowing your total income — including any rent, savings, or dividends — is key to making sure you don’t get caught out.
Income tax bands & rates for 2025–26
Once you’ve deducted your Personal Allowance, the rest of your income is taxed in bands:
Band | Taxable income | Rate |
Personal allowance | £0 – £12,570 | 0% |
Basic rate | £12,571 – £50,270 | 20% |
Higher rate | £50,271 – £125,140 | 40% |
Additional rate | Over £125,140 | 45% |
(Scotland uses slightly different rates.)
This means if your taxable income after allowances falls within the basic rate, you’ll pay 20% income tax on that amount.
How to estimate your tax?
Here is how to calculate your tax step-by-step:
- Add up your total income (employment, self-employment, rent, interest, etc.)
- Subtract your Personal Allowance
- Apply the correct tax bands to the remaining amount
And don’t forget: National Insurance Contributions (NICs) are separate from income tax, but also mandatory.
Example:
If you’re employed and earn £35,000:
- Taxable income after allowance: £22,430 (£35,000 minus £12,570)
- Income tax at 20% = £4,486
- NI (approx.) = £2,243
- Total tax + NI = £6,729
- Take-home pay = £28,271
National Insurance: What you pay and why it matters
National Insurance (NI) might feel like another deduction you’d rather not think about, but it plays an important role, helping fund your State Pension, NHS, and certain benefits.
If you’re self-employed or a sole trader, you usually pay two types of NI through your Self Assessment tax return:
Class 2 NI
- Paid automatically if your profits are £6,845 or more.
- If you earn less, you can still choose to pay voluntarily (around £3.50 per week) to protect your State Pension record.
Class 4 NI
- 6% on profits between £12,570 and £50,270.
- 2% on profits over £50,270.
These are separate from income tax, and while they might feel annoying, they’re part of keeping your future secure.
If you run a limited company and pay yourself a salary, you might also pay employee NI (8% on weekly earnings between £242–£967; 2% above that). But for most self-employed people, it’s Class 2 and Class 4 that matter most.
Tax on savings & dividends
Even if your main income is from your business, savings interest, and dividends can affect your tax.
Savings interest:
- Basic-rate taxpayers: £1,000 tax-free.
- Higher-rate taxpayers: £500.
- Additional-rate taxpayers: none.
- If your non-savings income is under £17,570, you might also qualify for the starting rate for savings (up to £5,000 tax-free).
Dividends (if you’re also a limited company director or have shares):
- First £500 tax-free (2025/26)
- Then:
- 8.75% (basic rate)
- 33.75% (higher rate)
- 39.35% (additional rate)
Dividends come from profits after Corporation Tax, and you declare them in your Self Assessment.
Other allowances & reliefs you shouldn't miss
Pension contributions
Paying into a pension can reduce your taxable income. For example, if you contribute £1,000, you might only pay £800 (with £200 added as tax relief). It’s a great way to save while lowering your tax bill.
Marriage allowance
If your spouse earns under the £12,570 Personal Allowance, they can transfer up to £1,260 to you, reducing your tax by up to £252 a year.
Property allowance
If you rent out property, the first £1,000 you make each year is tax-free. This is known as your Property Allowance. But if your rental income exceeds £1,000, you must declare it and choose whether to use the allowance or claim actual expenses.
Tips to reduce your tax bill (legally!)
Claiming what you’re entitled to means keeping more of what you earn.
- Use salary sacrifice to lower taxable income
- Pay into a pension as contributions are tax-deductible
- Max out your Individual Savings Accounts (ISAs) for tax-free savings
- Claim allowable expenses if self-employed (e.g., home office, mileage)
- Keep records and files early to avoid errors
Should you get an accountant?
If you’re new to being self-employed, your tax might seem simple now, but as your business grows, so can the paperwork.
A good accountant can:
- Calculate what you really owe (so you don’t overpay).
- Find allowances and reliefs you might miss.
- Advise on tax-efficient ways to pay yourself.
- Help with Self Assessment and deadlines.
- Give you peace of mind that everything’s done right.
Think of them as a partner who saves you time, money, and stress.
Conclusion
So, how much tax should you pay? It depends on your total income, what you can claim, and staying on top of your records.
By understanding your numbers, using HMRC tools, and asking for expert help when needed, you can avoid nasty surprises and protect both your business and your future.
Whether you’re a sole trader, freelancer, or limited company director, tax doesn’t have to be scary. And if you ever feel unsure, remember — help is only a call away.
Need advice? Reach out to us — we’re here to make tax simpler, so you can focus on growing your business.
