Most sole traders know roughly when the tax is due. Far fewer know what is actually in the number. The bill that lands in January is not one tax. It is several things added together, and some of them are advance payments for a year that has not finished yet. That is why the first January bill after a good year so often feels bigger than it should.
This guide takes the bill apart, piece by piece, for the 2025 to 2026 tax year, which is the return you can file now and the one due by 31 January 2027. The figures below are for England, Wales and Northern Ireland. Scotland sets its own Income Tax bands, although the National Insurance rules are the same.
Start with profit, not what you took out
Tax is charged on your profit for the year, not on the money you moved from the business account to your own. Profit is your sales less your allowable business costs. Our guide to allowable expenses covers what counts.
Since April 2024 most sole traders work out that profit on the cash basis by default. That means you count income when it is paid to you and costs when you pay them, rather than when an invoice is raised. It is simpler, and it suits most service businesses. You can still choose the traditional accruals method on your return if your business holds stock or carries large unpaid invoices, but you now have to tick a box to do so.
With a profit figure in hand, there are three parts to the bill for almost everyone, and two more for some.
Part one: Income Tax
Your first £12,570 of income is covered by the personal allowance, so there is no Income Tax on it. Above that, the rates for 2025 to 2026 are:
| Band | Income | Rate |
|---|---|---|
| Personal allowance | Up to £12,570 | 0 per cent |
| Basic rate | £12,571 to £50,270 | 20 per cent |
| Higher rate | £50,271 to £125,140 | 40 per cent |
| Additional rate | Over £125,140 | 45 per cent |
Two things catch people here. The bands apply to all your income added together, so if you also have a job, rental income or savings interest, your business profit sits on top of that and may be taxed at a higher rate than you expected. And the personal allowance starts to disappear once your total income passes £100,000, at a rate of £1 for every £2 above that line.
Part two: Class 4 National Insurance
This is the part that surprises people who have only ever been employed. Self-employed profit carries its own National Insurance, worked out on your return and paid with your tax.
| Profit | Class 4 rate |
|---|---|
| Up to £12,570 | 0 per cent |
| £12,571 to £50,270 | 6 per cent |
| Over £50,270 | 2 per cent |
So a basic rate sole trader is really paying 26 per cent on each pound of profit above £12,570, not 20. That is the number to have in your head when you are deciding how much to set aside.
Part three: Class 2 National Insurance, which is now mostly free
Class 2 used to be a small weekly charge that every sole trader paid. That stopped in April 2024. If your profit for 2025 to 2026 is £6,845 or more, you are treated as having paid Class 2 without paying anything, and the year still counts towards your State Pension.
If your profit is below £6,845, nothing is charged automatically, but the year will not count towards your State Pension unless you choose to pay Class 2 voluntarily. For 2025 to 2026 that costs £3.50 a week, which is £182 for the year. For a qualifying year towards the State Pension, that is one of the better deals in the tax system, and the box to tick is on the return.
Part four: the payment on account
This is the piece that makes January painful, and the one people least expect.
If your bill for the year is over £1,000, and less than 80 per cent of your tax was taken off at source, HMRC asks you to pay next year’s tax in advance, in two halves. The first half is due on 31 January 2027 alongside the balance for 2025 to 2026. The second half is due on 31 July 2027. Each half is 50 per cent of this year’s Income Tax and Class 4 bill.
So your January payment can be one and a half times your actual bill for the year. Our guide to payments on account explains how they work and when you can reduce them.
The good news is that this works in both directions. If you made payments on account last January and July, they come off this year’s bill before anything else is added. The January 2027 payment is this year’s bill, less what you already paid on account, plus the first instalment for next year.
The extras that apply to some people
A student loan. If you have a student loan and your income is above the threshold for your plan, your repayment is collected through the return, not separately. For 2025 to 2026 the rate is 9 per cent of income above the threshold, which is £28,470 for a Plan 2 loan and different for other plans, and 6 per cent for a postgraduate loan. On £40,000 of profit with a Plan 2 loan, that is £1,037.70 added to the January bill.
The High Income Child Benefit Charge. If you or your partner receive Child Benefit and the higher earner has income over £60,000, some of it is clawed back through the return. The charge is 1 per cent of the Child Benefit for every £200 of income over £60,000, so at £80,000 the whole of it is repaid.
A worked example
Take a sole trader with a profit of £40,000 for 2025 to 2026, no other income, and no payments on account made last year because this is their first full year.
| Piece of the bill | Working | Amount |
|---|---|---|
| Income Tax | £27,430 at 20 per cent | £5,486.00 |
| Class 4 National Insurance | £27,430 at 6 per cent | £1,645.80 |
| Bill for 2025 to 2026 | £7,131.80 | |
| First payment on account for 2026 to 2027 | Half of £7,131.80 | £3,565.90 |
| Due on 31 January 2027 | £10,697.70 | |
| Due on 31 July 2027 | Second payment on account | £3,565.90 |
The tax on a £40,000 profit is £7,131.80, which is a shade under 18 per cent. But the cheque in January is £10,697.70, because half of next year’s tax is being collected at the same time. In the second year, with payments on account already made, the January figure settles down to something closer to the true bill.
Add a Plan 2 student loan and the January payment is £11,735.40. The loan repayment is not included in payments on account, so it is collected once rather than in advance.
How much to put aside
For a sole trader whose profit sits inside the basic rate band, setting aside 25 per cent of every pound of profit above £12,570 covers the Income Tax and the Class 4. Round that up to 30 per cent if you have a student loan or expect to cross £50,270, where the combined rate jumps to 42 per cent.
Put it in a separate account you do not look at. The sole traders who find January easy are not the ones who earn the most. They are the ones who moved the tax out of reach as each invoice was paid.
If the number still looks bigger than your bank balance, there are options, and they are all better the earlier you use them. HMRC will usually agree to instalments through a payment plan, and a bill under £3,000 can be collected through your tax code if you also have a job and file by 30 December.
Know the number in the autumn, not in January
Everything above can be worked out today. The tax year ended on 5 April 2026 and the figures are final. Filing now does not bring the payment date forward, as our guide to filing your tax return early explains. It just means you know what January holds with three months to prepare for it instead of three days.
Our clients get their return prepared in the autumn, with each line of the bill explained in plain English, so the January figure is never a surprise. Our Sole Trader service is £62.50 per month, fixed, and includes the return, the filing, and the conversation about how much to set aside. There is no extra charge for picking up the phone.
If you would like to know what your January bill will be while there is still time to plan for it, Get your instant quote and see your fixed monthly fee in under a minute.