The system in three sentences
You're taxed on profit (income minus allowable expenses), not on what you invoice. You pay two things on that profit: income tax (0% up to the £12,570 personal allowance, then 20%, 40% above £50,270, 45% above £125,140) and Class 4 National Insurance (6% between £12,570 and £50,270, 2% above). It's all settled through Self Assessment — with the twist that once your bill passes £1,000, HMRC starts collecting next year's tax in advance through payments on account.
That twist is where first-timers get hurt: the first bill can be 150% of what you expected, in one lump, on 31 January. The full guide walks the numbers, the calendar and the fix.
What you actually pay: worked example
Say your profit for 2026/27 is £45,000 (after expenses — see our expenses guide for getting that number down legitimately):
- Personal allowance: first £12,570 — no income tax
- Income tax: 20% × (£45,000 − £12,570) = £6,486
- Class 4 NI: 6% × (£45,000 − £12,570) = £1,946
- Total: ~£8,432 — an effective rate of about 19% on the whole profit
(Class 2 NI is no longer payable — your state pension record is protected automatically at this profit level. Scottish income tax bands differ.)
Payments on account: the ambush, defused
Because your bill exceeds £1,000, HMRC assumes next year will match it and collects in advance:
- 31 January 2028: £8,432 (2026/27 balance) plus £4,216 (first payment on account for 2027/28) = £12,648
- 31 July 2028: £4,216 (second payment on account)
Nothing extra is being charged — you're just paying next year's tax as you go. But the first time it happens, the January bill is half as big again as you expected. If you know profits will fall, you can apply to reduce payments on account — reduce them too far, though, and HMRC charges interest on the shortfall.
The fix: pay yourself like an employer would Move a fixed percentage of every payment you receive into a separate tax pot the day it lands. At £45k profit, ~20% covers you; £60k+, use 25–30%. A Mettle account's pots make this a 10-second habit — and FreeAgent shows your live tax estimate all year, so the pot and the bill converge. Every
package we sell includes that setup.
Your calendar
- 31 January — online return deadline for the previous tax year + balancing payment + first payment on account
- 6 April — new tax year; if you're in MTD, quarterly updates run from here (7 Aug, 7 Nov, 7 Feb, 7 May deadlines)
- 31 July — second payment on account
- 5 October — deadline to register for Self Assessment if you started self-employment last tax year
Five legitimate ways to shrink the bill
- Claim every allowable expense — most DIY returns under-claim. Vehicles, home working, tools, phone: our A–Z guide.
- Pension contributions — personal contributions extend your basic-rate band; powerful once you're near £50,270.
- Capital allowances — equipment and (for some) vehicle costs against profit via Annual Investment Allowance.
- Use the right accounting basis — the cash basis is now the default and usually friendlier for small businesses; sometimes accruals wins. Worth an actual look, not a default.
- Check the structure itself — past roughly £30–50k of consistent profit, a limited company may save real money. Our comparison guide runs the maths.
