What a sole trader owes
If you are self-employed in the UK, nobody deducts tax from what your clients pay you. Once a year you file a Self Assessment return, and HMRC works out two amounts on your profit:
- Income tax, on profit above your personal allowance.
- Class 4 National Insurance, on profit above the lower profits limit.
The tax year runs from 6 April to 5 April. For the 2025/26 year, which ended on 5 April 2026, the online return and the balancing payment are both due by 11:59pm on 31 January 2027. A paper return was due by 31 October 2026.
That gap — up to 22 months between earning the first pound and paying the tax on it — is why saving for Self Assessment is a discipline problem more than an arithmetic one. The money sits in your account for a long time looking like yours.
The rates for 2025/26 and 2026/27
For England, Wales and Northern Ireland, the income tax figures are the same in both years:
| Band | Income | Rate |
|---|---|---|
| Personal allowance | Up to £12,570 | 0% |
| Basic rate | £12,571 – £50,270 | 20% |
| Higher rate | £50,271 – £125,140 | 40% |
| Additional rate | Over £125,140 | 45% |
The personal allowance shrinks by £1 for every £2 of adjusted net income over £100,000, and is gone by £125,140. Across that range each extra pound costs 40p of tax on itself plus 20p more because 50p of allowance disappears — an effective 60% income tax rate that is easy to miss when you set a reserve.
Scotland is different. If you live in Scotland, Scottish Income Tax applies to your wages, pension and most other taxable income. For 2026/27 it has six bands above the personal allowance, from a 19% starter rate to a 48% top rate. Use the Scottish bands in place of the table above.
Class 4 National Insurance for both 2025/26 and 2026/27:
| Profits | Class 4 rate |
|---|---|
| Up to £12,570 (lower profits limit) | 0% |
| £12,570 – £50,270 | 6% |
| Over £50,270 | 2% |
Put together, a basic-rate sole trader in England pays 26p in every pound of profit above £12,570 (20% income tax plus 6% Class 4), and a higher-rate one pays 42p (40% plus 2%).
Class 2 has changed. From 6 April 2024 self-employed people no longer have to pay Class 2 contributions. If your profits are at or above the small profits threshold — £6,845 for 2025/26 and £7,105 for 2026/27 — you are treated as having paid them, which protects your National Insurance record. Below that threshold you can choose to pay voluntarily, at £3.50 a week for 2025/26 or £3.65 a week for 2026/27. For most sole traders, Class 2 has dropped out of the reserve calculation.
How payments on account work
Once you are established, HMRC does not wait until January to collect the whole year. It asks for two advance payments towards the current year’s bill, called payments on account:
- Due by midnight on 31 January and 31 July.
- Each one is half of the previous year’s bill.
- They cover income tax and Class 4 National Insurance.
- Anything still owing after both is the balancing payment, due the following 31 January — on the same day as the next year’s first payment on account.
You do not have to make payments on account if last year’s Self Assessment bill was less than £1,000, or if more than 80% of the tax you owed last year was already paid outside Self Assessment — for example through PAYE on a salary.
Laid out as a calendar, a year in Self Assessment has four dates worth writing down:
- 5 April — the tax year ends. The profit for the year is now fixed, even though nothing is due yet.
- 31 July — the second payment on account for the year that has just ended.
- 31 October — the deadline for a paper return.
- 31 January — the online return, the balancing payment for the year that ended the previous April, and the first payment on account for the year you are now in, all on the same day.
January is the heavy date. It carries up to three things at once, and the reserve has to be sized for it rather than for an average month.
If you expect profit to fall, you can ask HMRC to reduce your payments on account using form SA303. If you cut them too far and the final bill is higher, HMRC charges interest on the shortfall.
Worked example: the first-year cash shock
A sole trader in England who started on 6 April 2025
First year, 2025/26: profit £40,000, no other income.
| 2025/26 | Amount |
|---|---|
| Income tax: (£40,000 − £12,570) × 20% | £5,486.00 |
| Class 4: (£40,000 − £12,570) × 6% | £1,645.80 |
| Total bill for the year | £7,131.80 |
That is 17.8% of profit. Someone who saved exactly that has done the arithmetic right and is still going to be short, because of what is due on 31 January 2027:
| Due | What it is | Amount |
|---|---|---|
| 31 Jan 2027 | 2025/26 bill in full (no payments on account were due in year one) | £7,131.80 |
| 31 Jan 2027 | 1st payment on account for 2026/27 (50% of £7,131.80) | £3,565.90 |
| Total on 31 January 2027 | £10,697.70 | |
| 31 Jul 2027 | 2nd payment on account for 2026/27 | £3,565.90 |
The January figure is 150% of a year’s tax. Between January and July 2027 this person pays £14,263.60 — two years’ worth of tax at the first year’s level — while also running the business in its second year.
Now say 2026/27 goes better: profit £48,000. The bill is £7,086.00 income tax plus £2,125.80 Class 4, so £9,211.80. The payments on account already covered £7,131.80, leaving a balancing payment of £2,080.00 on 31 January 2028, plus a first payment on account for 2027/28 of £4,605.90 (half of £9,211.80). That January bill is £6,685.90.
The shock only happens once. From year two onwards, each January is roughly one balancing payment plus half a year — heavier when profit is rising, lighter when it is flat or falling.
How much to save from each invoice
The reserve rate is your effective rate on profit: income tax plus Class 4, divided by profit. Not your marginal rate, which over-saves, and not the basic rate alone, which leaves out National Insurance.
Reserve rate = (income tax + Class 4) ÷ expected profit
In the example that is 17.8% in a normal year. In the first year it needs to be about 26.7% — £10,697.70 ÷ £40,000 — to have the January 2027 bill in the account when it lands, with the July payment still to find.
A few practical rules:
- Reserve on profit, not on the invoice. If expenses run at 20% of what you bill, apply your rate to the other 80%.
- Reserve at the marginal rate on growth. If you have already passed £50,270 of profit this year, every further pound needs 42p set aside, not the average.
- Keep VAT separate. If you are VAT-registered, the VAT you charge was never income and needs its own pot.
- Move it on the day it arrives. A separate account, ideally at a different bank, is the whole mechanism. The longer the money sits with your spending money, the more of it gets spent.
The routine is covered in more detail in reserving tax on irregular income. CashDesk works this out for the UK system — income tax, Class 2 and Class 4 National Insurance, the personal allowance taper, and payments on account with the balancing payment — and shows the next payment and its due date under the reserve figure. It prepares the numbers for your return; it never submits anything to HMRC.
What this cannot tell you
The example is deliberately simple. Several ordinary situations change the answer:
- A salary as well. PAYE income uses your personal allowance and basic-rate band first, so self-employed profit on top may be taxed at a higher rate. If more than 80% of last year’s tax was collected at source, payments on account may not apply at all.
- Other income. Rental profit, savings interest and dividends all go on the same return, with their own rules.
- Anything else on your return — capital gains, for example — is not in the example.
- Pension contributions, losses and allowances can reduce the bill, sometimes by a lot.
- Trading through a limited company is a different calculation entirely.
Rates and thresholds change, and the figures above are for 2025/26 and 2026/27 only. Check the current ones on GOV.UK, and if this is your first year of self-employment, a single conversation with an accountant now is cheaper than a January you had not planned for.