The question every sole trader asks in year one: how much of this is actually mine? Here's the 2026/27 picture, with worked examples you can sanity-check against your own numbers.
The building blocks
As a sole trader you pay tax on profit (income minus allowable expenses), not turnover. Two charges apply:
Income Tax (England, Wales & NI)
| Band | Profit range | 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% |
Class 4 National Insurance
- 6% on profits between £12,570 and £50,270
- 2% on profits above £50,270
Class 2 NI is no longer charged — your state pension record is credited automatically once profits pass £6,845.
Worked examples
£25,000 profit
- Income Tax: (£25,000 − £12,570) × 20% = £2,486
- Class 4 NI: (£25,000 − £12,570) × 6% = £746
- Total: ~£3,232 — an effective rate of about 13%.
£45,000 profit
- Income Tax: (£45,000 − £12,570) × 20% = £6,486
- Class 4 NI: (£45,000 − £12,570) × 6% = £1,946
- Total: ~£8,432 — effective rate about 19%.
£70,000 profit
- Income Tax: £37,700 × 20% + (£70,000 − £50,270) × 40% = £15,432
- Class 4 NI: £37,700 × 6% + £19,730 × 2% = £2,657
- Total: ~£18,089 — effective rate about 26%.
Don't forget payments on account
If your bill exceeds £1,000, HMRC asks for next year's tax in advance: 50% on 31 January and 50% on 31 July. In your first year this means roughly 150% of your bill lands at once — the single most common cash-flow shock for new sole traders.
The rule of thumb
Set aside 25–30% of every invoice into a separate tax pot and you'll rarely be caught short. Better still, track it live: LedgerlyPro's tax estimator recalculates your bill every time an invoice is paid or an expense lands, so the number is never a surprise. See pricing or start a free trial — try all features free for 30 days.
