Self-employed tax calculator

Why the same money costs less than a salary

Income tax is identical. A sole trader and an employee with the same taxable amount pay the same income tax, in the same bands, under the same allowance taper. The difference is entirely National Insurance: Class 4's main rate is 6% where an employee's Class 1 is 8%, and there is no employer contribution at all.

That last part is the one worth sitting with. An employer pays secondary National Insurance on top of a salary, which never appears on the employee's payslip but is part of what they cost. A sole trader has no employer, so nobody pays it — and nobody is putting anything into a pension for them either.

England and Northern Ireland, no student loan, no pension. The gap is Class 4 costing less than Class 1 — it is not free money, because it buys a thinner set of entitlements and no employer pension contribution.

Class 2 is not a bill any more, and that is the trap

Since April 2024 a sole trader with profits at or above the Small Profits Threshold of £7,105 has Class 2 treated as paid. The year counts towards the State Pension and nothing changes hands. Most calculators report this as "Class 2: £0" and move on, which is right and useless.

Below that threshold the £0 means something completely different. Nothing is due — and the year does not count. It can be bought, at £4 a week, which is about £190 for a qualifying year and far less than the voluntary rate available to anyone who is not self-employed. A part-time or start-up year spent below the threshold is the cheapest State Pension year most people will ever be offered, and it is only cheap while it is still the current year.

The calculator above says which side of the threshold you are on rather than printing a zero that means two opposite things.

Class 4 stops a year later than an employee's National Insurance does

Reaching State Pension age ends National Insurance, but not on the same day for everyone. An employee stops paying Class 1 when they reach it — the birthday, mid-year, mid-payslip. A sole trader keeps paying Class 4 for the whole of that tax year and stops from the following 6 April. Two people who share a birthday, one employed and one self-employed, therefore stop at points up to a year apart.

That is why the switch above asks whether the tax year began after you reached it, rather than asking your age. It is the statutory test, it is answerable without arithmetic, and it is the version that gets the year of the transition right instead of guessing at it. Income tax carries on regardless in both cases: age is not a relief, and the State Pension itself is taxable income that uses up your allowance before anything else does.

The first-year cash flow shock

A first Self Assessment bill is usually much larger than the tax on the year it covers, because it arrives with the first payment on account attached. In January you settle the year that has ended and pay half of the next year's estimate at the same time — so the January after a first profitable year can ask for one and a half times the bill anyone budgeted for.

The second payment follows in July, and from then on the pattern is steady: half in January, half in July, with a balancing payment or refund whenever the year turns out different from the estimate. It only feels like a penalty once. The panel above the fold shows both years, so the number to put aside is the one on the January line, not the one in the headline.

If you also have a job, the two answers touch in exactly one place

Run this page for the trade, run the employment calculator for the salary, and add the answers together: that is right for income tax, because the two incomes simply stack. It is wrong for National Insurance, and by more than people expect. Class 1 on the salary and Class 4 on the profit are charged by two systems that never speak, so between them they can charge the main rate twice over the same band of income. Regulation 100 caps that — and the cap is the one figure neither calculation produces on its own.

Enter the salary below and this works out what Class 4 can actually be charged. It changes nothing above: the income tax, the payments on account and the Class 2 position on this page all still assume the trade is your only income, because the salary is taxed through its own payroll and the two do not interact for income tax at all.

What this does not do

• It takes your profit as given. Working out allowable expenses, capital allowances and whether the trading allowance beats claiming expenses is a bigger job than this calculation and changes the answer by more. For a small trade, the side hustle page now makes exactly that allowance-or-expenses choice for you.
• It assumes self-employment is your only income for income tax. A job alongside a trade is taxed through its own payroll, so use the employment calculator for that side — but do not treat the National Insurance answers as separate, because they are not. The section above works out the cap that applies when both are charged.
• It says nothing about VAT, or about capital allowances on equipment you buy. Whether a limited company would leave you better off is a third question, and the company side of it — corporation tax, then salary and dividends back out — is worked through on the salary versus dividends page. What no page here does is the switching cost of incorporating a business that already exists.
• Class 2 is reported as a position, not a payment, because since April 2024 it is not collected from anyone whose profits are above the threshold.

Sole trader questions

Is it worth paying voluntary Class 2 below the threshold?

Often, and only while the offer stands. A year below the Small Profits Threshold does not count towards your State Pension unless you buy it, and at £4 a week — about £190 for the year — Class 2 is the cheapest qualifying year available anywhere in the system. Whether you need the year depends on your record, so check your State Pension forecast before paying: someone already heading for the full amount is buying nothing.

How much tax will I pay as a sole trader?

Income tax on your profit at the same rates an employee pays on salary, plus Class 4 National Insurance, which is charged at a lower rate than an employee’s Class 1. That lower rate is the reason a sole trader keeps slightly more of the same figure — and it buys a thinner set of entitlements.

What is a payment on account?

An advance instalment towards next year’s bill, and the reason a first January is so much larger than expected. You settle the year that ended and pay half of the next year’s estimate at the same time, then the other half in July. It feels like a penalty exactly once.

Do I still need to pay Class 2 National Insurance?

Not as a bill. Since April 2024 profits at or above the Small Profits Threshold have Class 2 treated as paid, so the year counts and nothing changes hands. Below the threshold nothing is due and the year does not count unless you buy it voluntarily — two very different situations that both show as zero.

How much should I set aside for tax?

Enough for the whole bill above plus the first payment on account, which is the figure most first-year traders miss. Setting aside a flat percentage of every invoice works if the percentage is the effective rate from this calculator rather than a band rate.