UK Self-Employed Tax Guide 2026: Sole Traders and Side Hustles
Roughly 4.3 million people in the UK are self-employed, and several million more earn extra income from side hustles — driving for delivery apps, selling on Etsy, freelance design, weekend tutoring. HMRC's view of all this income is identical: above the £1,000 trading allowance, you must register for Self Assessment, file a return and pay tax and National Insurance. This guide explains, in plain English, how the self-employed tax system works in 2026, the allowable expenses many people miss, and the looming Making Tax Digital changes that affect everyone earning over £20,000 from self-employment.
The trading allowance and registration
The £1,000 trading allowance lets you earn up to £1,000 of self-employed or miscellaneous income in a tax year tax-free without registering. Earn £1 more and you must register for Self Assessment by 5 October following the end of the tax year in which you exceeded the threshold.
Registration is straightforward via gov.uk. You'll receive a Unique Taxpayer Reference (UTR) within 10 working days. The first Self Assessment return covering your trading is due the following 31 January, with payment of any tax due on the same date.
Income tax and National Insurance
Self-employed profit is added to your other income for income tax: 0% on the first £12,570 (Personal Allowance), 20% to £50,270, 40% to £125,140, and 45% above. Class 4 NI applies on profits: 6% (down from 9%) on profits between £12,570 and £50,270, and 2% above that, in 2026/27.
Class 2 NI was effectively abolished from April 2024 — those with profits above the £6,725 Small Profits Threshold automatically receive a qualifying year for State Pension purposes without paying. Profits below £6,725 can still pay voluntary Class 2 (around £180) to protect their NI record — usually excellent value.
Allowable expenses many people miss
You can deduct any expense incurred 'wholly and exclusively' for the business. The obvious ones — materials, stock, professional fees, business insurance — are well known. The often-missed ones include: a proportion of home running costs (the simplified £6 to £26 per month flat rate or actual usage based on rooms and time), business mileage at 45p per mile (up to 10,000 miles, then 25p), bank charges on a business account, professional subscriptions, training that maintains existing skills, and a proportion of mobile phone and internet costs.
Capital items (laptops, tools, vehicles) are claimed via the Annual Investment Allowance — 100% of cost up to £1m per year for most assets. Cars are capital allowances at 100% for zero-emission vehicles, 18% writing-down for low-emission and 6% for higher-emission. Choose carefully.
Payments on account
If your tax bill exceeds £1,000, HMRC requires payments on account toward next year's bill. Each payment is half of last year's liability, due 31 January and 31 July. So your first January Self Assessment bill includes the previous year's tax plus the first payment on account for the current year — often a nasty surprise of 1.5x what you expected.
Reduce payments on account if you genuinely expect lower profits this year (form SA303), but be careful — underpayment triggers interest. Better to set 30% of every invoice aside in a separate savings account from day one.
Making Tax Digital for Income Tax
MTD for Income Tax Self Assessment (MTD ITSA) starts April 2026 for those with self-employment or property income over £50,000, and April 2027 for those over £30,000. Government is consulting on a further drop to £20,000 from April 2028.
Affected taxpayers must keep digital records, submit quarterly updates to HMRC via approved software (FreeAgent, Xero, QuickBooks, Sage, and a growing range of free tools), and a final end-of-period statement and tax return after the year end. Move to compatible software early — last-minute migration is the single biggest cause of MTD penalties.
Frequently asked questions
Do I have to register if I'm employed too?
Yes — once self-employed income (or other untaxed income) exceeds £1,000, register regardless of your employment income.
Can I claim my home office?
Yes — either the simplified flat rate (£6/month for under 25 hours, up to £26/month for 101+ hours) or actual costs based on rooms used and time.
What if I miss the 31 January deadline?
An automatic £100 penalty, plus daily penalties of £10 (max £900) after 3 months, then 5% of tax due at 6 and 12 months. Interest also applies on unpaid tax.