Self-Employed vs Employed Tax in the UK (2026/27)
Income Tax is calculated the same way whether you're employed or self-employed — the differences are in National Insurance, how tax is paid, and what you get in exchange for it. This guide covers what actually changes.
For employed take-home pay figures, use the UK Take-Home Pay Calculator. This page focuses on what's different for the self-employed.
Contents
Income Tax is the same either way
There's a common misconception that self-employed people pay less Income Tax. They don't — the same Personal Allowance (£12,570) and the same 20%/40%/45% bands apply to self-employed profit exactly as they apply to employed salary. See the Income Tax Explained guide for the full mechanics.
What genuinely differs is National Insurance.
National Insurance is lower — Class 4 explained
Employees pay Class 1 NI at 8% (between £12,570 and £50,270) and 2% above that. Self-employed people pay Class 4 NI instead, on annual profits:
| Threshold | 2026/27 | Rate |
|---|---|---|
| Below Lower Profits Limit | Up to £12,570 | 0% |
| Lower Profits Limit to Upper Profits Limit | £12,570 – £50,270 | 6% |
| Above Upper Profits Limit | Over £50,270 | 2% |
The 6% rate (versus 8% for employees) reflects a series of cuts to self-employed NI in recent years, intended to partly offset the fact that self-employed people don't benefit from an employer also paying NI on their behalf, and don't accrue the same benefit entitlements.
Class 2 National Insurance — abolished from April 2024
Previously, self-employed people with profits above the Small Profits Threshold also paid a flat weekly Class 2 contribution. Since 6 April 2024, this has been abolished:
- Profits above the Small Profits Threshold (£7,105 for 2026/27): you get a qualifying year for State Pension purposes automatically, with no Class 2 payment required.
- Profits below £7,105: you can still choose to pay Class 2 voluntarily (£3.65/week for 2026/27) to protect your State Pension record, since low or no profit wouldn't otherwise generate a qualifying year.
How and when self-employed tax is paid
Unlike PAYE, where tax is deducted automatically every payday, self-employed people report income and pay tax through Self Assessment, on a set annual timetable:
| Deadline | What's due |
|---|---|
| 5 October | Register for Self Assessment (if newly self-employed) |
| 31 October | Paper tax return deadline |
| 31 January | Online tax return deadline and balancing payment for the previous tax year |
| 31 January | First "payment on account" for the current tax year |
| 31 July | Second "payment on account" for the current tax year |
Payments on account are advance payments toward your next tax bill, each set at half of your previous year's tax and Class 4 NI bill. They're designed to keep self-employed tax roughly in step with PAYE's pay-as-you-go approach, but they mean a first year of self-employment can involve paying 150% of a year's tax bill at once (the full balance plus the first payment on account) — a common cash-flow shock worth planning for.
What self-employed people don't get
The lower Class 4 rate isn't free — it comes without several things employees usually get automatically:
- No employer pension contributions — self-employed people must arrange and fund their own pension entirely.
- No Statutory Sick Pay — no income continues automatically if you can't work due to illness.
- No paid holiday.
- No Statutory Maternity/Paternity Pay in the employed sense — self-employed people may be eligible for Maternity Allowance instead, at a different rate and under different rules.
- No employer National Insurance paid on your behalf — while this doesn't cost you directly as an employee either, it reflects a broader difference in how the two are treated.
- No redundancy pay or the same unfair dismissal protections.
Worked example: £40,000 profit
Comparing an employee earning £40,000 salary against a self-employed person with £40,000 profit (both standard tax code, no pension, no student loan):
| Employed | Self-employed | |
|---|---|---|
| Income Tax | £5,486 | £5,486 |
| National Insurance | £2,194 (Class 1, 8%) | £1,646 (Class 4, 6%) |
| Total tax & NI | £7,680 | £7,132 |
| Take-home | £32,320 | £32,868 |
At this income, self-employment leaves roughly £548/year more after tax and NI — but without sick pay, holiday pay, employer pension contributions, or the same safety net if work dries up. Whether that trade-off is worthwhile depends entirely on individual circumstances, not just the headline numbers.
Allowable expenses
Self-employed profit — the figure actually taxed — is revenue minus allowable business expenses, which is another structural difference from employment (where tax is charged on gross salary before any work-related costs). Common allowable expenses include office costs, travel (excluding ordinary commuting), stock and materials, professional fees, and a proportion of home costs if working from home. HMRC also offers simplified flat-rate expense options for some categories. Getting this right has a direct, sometimes large, effect on the tax actually owed — it's worth using proper bookkeeping or an accountant rather than estimating.
FAQ
Do self-employed people pay less tax overall?
Income Tax is identical. National Insurance is lower (6%/2% vs 8%/2%), which does reduce the total tax and NI bill somewhat — but self-employed people also lose sick pay, holiday pay, employer pension contributions, and other benefits that have real financial value.
When do I need to register as self-employed?
By 5 October following the end of the tax year in which you started — e.g. if you started trading in June 2026 (2026/27 tax year), you'd need to register by 5 October 2027.
What are payments on account?
Advance payments toward your next year's tax bill, each set at 50% of the previous year's tax and Class 4 NI liability, due 31 January and 31 July. They can make your first year of self-employment involve a larger-than-expected total payment.
Do I still build up State Pension entitlement if self-employed?
Yes — profits above the Small Profits Threshold (£7,105 for 2026/27) generate a qualifying year automatically since Class 2 NI was abolished in April 2024, with no separate payment required.
Can I be both employed and self-employed at the same time?
Yes — many people have a PAYE job alongside self-employed income, and are taxed on the combined total, with each type of income going through its respective system (PAYE for the job, Self Assessment for the self-employed profit).
More guides
This page is for general information only and does not constitute tax advice. Figures are correct for the 2026/27 tax year. For advice on your specific situation, consult HMRC or a qualified accountant.