You Went Self-Employed in 2025. Here Is What Happens in January 2027

If you went self-employed in April 2025 or at any point during the 2025/26 tax year, your first Self Assessment return is due by 31 January 2027. The return covers everything you earned from self-employment between 6 April 2025 and 5 April 2026. On that same date, 31 January 2027, your full tax bill is due for payment. Most first-year sole traders are not prepared for how much that bill is, or that it includes a second charge on top of the main tax called payment on account.

Dan left his corporate IT job in Sheffield in April 2025. He had spent twelve years as a senior infrastructure consultant, earned a good salary, paid his taxes through PAYE without thinking about them and assumed self-employment would work itself out. He invoiced his first client in May 2025. By the end of the year he had three regular clients and was earning more than he had in employment.

What Dan had not done was calculate what he owed. He knew January 2027 was the deadline. He had a rough idea his bill would be somewhere around 20 percent of what he earned. What he did not know was 20 percent of what and he had no idea that January was going to ask for significantly more than that.

The sooner Dan and anyone in his position finds the number, the more options there are. The tax bill is the same whenever it is calculated. What changes is how much time there is to plan for it, save toward it and file without the pressure of a deadline breathing down your neck.

Do You Need to Register for Self Assessment?

If you earned more than £1,000 from self-employment in the 2025/26 tax year, yes. HMRC requires you to register for Self Assessment and file a return. The registration deadline for the 2025/26 tax year is 5 October 2026. If you registered on time, your Unique Taxpayer Reference arrived in the post within ten working days and your online Self Assessment account is ready to use.

If you have not registered yet, a late registration is significantly better than no registration. HMRC's approach to late registration is more lenient when the taxpayer comes forward voluntarily before being contacted. Being contacted by HMRC first changes the nature of that conversation considerably. Our 5 October registration deadline guide covers what to do if you missed it and how to handle the late registration process.

Dan registered in September 2025 early, because a post in a Facebook group for freelancers flagged the October deadline and he acted on it immediately. His Unique Taxpayer Reference arrived within a week. His online account is set up. Registration is not his problem. Understanding what he owes is.

What Does Your 2025/26 Self Assessment Return Actually Cover?

Your Self Assessment return for 2025/26 covers every source of income you received between 6 April 2025 and 5 April 2026. For someone who went self-employed at the start of the tax year, this is primarily self-employment income. The return has a self-employment section where you declare your total gross income and your total allowable expenses. The difference is your trading profit. Your tax is calculated on that profit.

If you also had employment income during 2025/26 because you left a job partway through the year — the return includes an employment section too. You declare your P45 figures there: gross salary, tax deducted through PAYE and any student loan deducted through payroll. The calculation accounts for what was already collected by your employer so you do not pay it twice.

Dan went self-employed in April 2025 having left his employed role at the end of March. He had no employment income in 2025/26, just self-employment from day one. His return covers one income source, which is the simpler position. Our separate guide on PAYE and self-employment in the same tax year covers the more complex calculation for people who left employment partway through the year.

What Is Your Taxable Profit and How Is It Calculated?

Your taxable profit is not your gross income. It is your gross income minus your allowable business expenses. Understanding this distinction is where most first-year sole traders save a significant amount of money.

Gross income is every pound a client paid you during the 2025/26 tax year before any deductions. If you invoiced £43,800 across the year, your gross income is £43,800.

Allowable expenses are the genuine costs of running your business. Mileage to client sites at 45p per mile. The business proportion of your phone bill. Software subscriptions used for work. Professional development courses. Equipment bought for the business. Home office costs if you work from home, either the HMRC flat rate of £6 per week or an actual proportion of your household costs.

Dan's gross self-employment income for 2025/26 was £43,800. His allowable expenses were £8,400, mileage to client sites across South Yorkshire, home office costs, software subscriptions, a new laptop claimed through Annual Investment Allowance and professional development courses. His taxable profit was £35,400. That is the number his tax is calculated on. Not £43,800.

What Taxes Does a Sole Trader Pay on Their Profit?

A sole trader pays three types of tax through Self Assessment: income tax, Class 4 National Insurance and if applicable, student loan repayments. Each is calculated differently and each has its own rates and thresholds confirmed for 2025/26.

Income tax. Your personal allowance for 2025/26 is £12,570. The first £12,570 of your taxable profit is tax-free. Everything above that up to £50,270 is taxed at the basic rate of 20 percent. Profit between £50,270 and £125,140 is taxed at the higher rate of 40 percent. Most first-year sole traders fall within the basic rate band.

Dan's taxable profit of £35,400 minus his personal allowance of £12,570 gives taxable income of £22,830. Income tax at 20 percent: £4,566.

Class 4 National Insurance. Class 4 NI is a charge specific to self-employment. It sits on top of income tax and never appears on a payslip because it is never collected through PAYE, it is always collected through Self Assessment. Class 2 NI was abolished in April 2024 and does not apply for 2025/26. Class 4 NI is charged at 6 percent on self-employment profit between £12,570 and £50,270, and 2 percent above £50,270.

Dan's profit of £35,400 minus the £12,570 lower threshold gives £22,830 subject to Class 4 NI. At 6 percent: £1,370.

Student loan. If you have a student loan, Self Assessment collects repayments on your self-employment profit above the plan threshold. This is separate from any repayments your employer collected through PAYE when you were employed. Our guide on student loan and self-employment covers all five UK plans and how the calculation works. Dan had no student loan.

Dan's combined tax and NI bill before payment on account: £4,566 plus £1,370 equals £5,936.

What Is Payment on Account and Why Does It Appear in January?

Payment on account is the element of the January bill that almost every first-year sole trader is completely unprepared for. It is an advance payment toward your 2026/27 tax bill, required when your combined Self Assessment bill exceeds £1,000. HMRC requires 50 percent of the current year's bill as an advance payment on 31 January on top of the main bill. A further 50 percent is due on 31 July 2027.

The logic is that HMRC moves sole traders to a pay-as-you-go system once the first year's bill is established. Rather than waiting until the following January for the full 2026/27 bill, HMRC collects two instalments toward it, one alongside the main bill on 31 January and one on 31 July.

Payment on account does not apply if your combined tax and NI bill is below £1,000, or if more than 80 percent of your tax is collected at source through PAYE. For most sole traders with meaningful self-employment income, it applies and it significantly increases the January payment.

How Much Should You Have Been Setting Aside Throughout the Year?

The correct set-aside percentage is not a round number. It depends on your taxable profit, your personal allowance position, your student loan plan and whether payment on account applies. For a sole trader in Dan's position, no employment income, no student loan, profit of £35,400 the combined effective rate including the first payment on account is approximately 38% of taxable profit, or roughly 30% of gross income.

A flat 20% set-aside, which is what many first-year sole traders default to, covers the income tax but not the Class 4 NI and not the payment on account. The shortfall accumulates quietly and becomes visible in January.

Dan had been saving around 20% of each invoice. He had approximately £8,700 set aside against an actual January liability of £8,904. He was broadly close on the main bill, but had not factored in the payment on account of £2,968 due on the same date. The moment he understood this, his priority changed from filing to finding the full £8,904 by 31 January 2027 and planning for the July payment on account separately.

If the money is not yet saved, the priority is to calculate the exact bill, understand what is available and make a plan. Filing the return as soon as records are complete means knowing the precise number and removing any uncertainty about what is owed. Our guide to how much to set aside for Self Assessment covers the full calculation for different profit levels and situations.

What Expenses Can You Claim on Your 2025/26 Tax Return?

The 2025/26 tax year ended on 5 April 2026. The expenses that were paid during the year are the ones that can be claimed. The priority now is to make sure every genuine business expense that occurred during the year is identified, evidenced and included. The most consistently missed categories among first-year sole traders are mileage, home office costs and the business proportion of phone and broadband bills.

Mileage at 45p per mile for the first 10,000 business miles is a significant deduction for anyone who drove to clients, suppliers or training events. A sole trader who drove 3,000 business miles during 2025/26 and has not yet recorded them has an unclaimed deduction of £1,350 worth £351 in reduced tax at the basic rate and NI combined.

Dan drove regularly to clients across South Yorkshire. He never kept a mileage log. Working back through his calendar appointments, emails arranging visits and a realistic estimate of the return journey for each regular client, he reconstructed approximately 4,200 business miles for the year. At 45p per mile that is a £1,890 deduction he would have lost entirely by ignoring the category.

Our post on 7 expenses most sole traders miss covers the categories most likely to be under claimed with the specific evidence needed to support each claim and what each one is worth at the basic rate.

What Records Do You Need to File the Return?

HMRC requires you to keep records of all income and expenses for at least five years after the 31 January filing deadline until at least 31 January 2032 for 2025/26 records. The records must be sufficient to support every figure on your return if HMRC asks to see them.

For a sole trader with straightforward self-employment income, the records needed are total gross income by client or source, total allowable expenses by category, a mileage log for any mileage claimed, receipts or bank statement evidence for significant purchases and platform transaction reports if income came through online platforms such as eBay, Etsy or Amazon.

If records were not kept consistently during the year, they can be reconstructed from bank statements, email receipts and platform reports. This is not a second-best option — a thorough reconstruction produces records as valid as those kept throughout the year and supports every figure on the return in exactly the same way. Our guide on how to reconstruct your 2025/26 records from bank statements covers the process in full.

Dan's invoices were in an email folder. His expenses were in a rough spreadsheet he kept until February 2026 before losing the habit. His mileage was reconstructed from his calendar. His bank statements filled the gaps. The reconstruction took a focused weekend and produced a complete picture of the 2025/26 year that he was confident in.

What Happens When Dan Calculates His Full Position

Dan entered his figures into the UK Sole Trader Tax Calculator 2025/26. Gross income £43,800. Allowable expenses £8,400, the calculator compared these against the £1,000 trading allowance automatically and confirmed actual expenses saved significantly more tax. Taxable profit: £35,400.

Income tax through Self Assessment: £4,566. Class 4 NI: £1,370. Payment on account: £2,968. Total due 31 January 2027: £8,904. Second payment on account due 31 July 2027: £2,968.

He had £8,700 set aside. He needed to find an additional £204 before January and begin saving toward the £2,968 July payment from his ongoing invoicing. Both were manageable because he had calculated the number before January rather than in January.

He filed his return as soon as his records were complete. The bill on the HMRC portal matched exactly what the calculator had shown him. He paid it. He set a reminder for 31 July 2027. He moved on.

The bill was the same as it would have been if he had calculated it in December. What was different was everything he could do with the information once he had it.

UK Sole Trader Tax Calculator 2025/26 — Calculate your January 2027 bill today. £19.99 →