Income Tax Explained
As a self-employed freelancer in the UK, Income Tax is your primary tax obligation. You pay Income Tax on your profits—that's your total income minus allowable business expenses.
Income Tax Bands 2025/26
The current tax bands for England, Wales, and Northern Ireland are:
| Band | Taxable Income | Tax Rate |
|---|---|---|
| Personal Allowance | Up to £12,570 | 0% |
| Basic Rate | £12,571 to £50,270 | 20% |
| Higher Rate | £50,271 to £125,140 | 40% |
| Additional Rate | Over £125,140 | 45% |
Note: Scottish taxpayers have different bands and rates. Check gov.uk for current Scottish rates.
How It Works in Practice
Income Tax is calculated progressively—you don't pay 40% on everything once you cross into the higher rate band. You pay each rate only on the portion of income within that band.
💡 Practical Example
Rebecca's freelance profits are £45,000. Her Income Tax calculation:
First £12,570: £0 (Personal Allowance)
Next £32,430: £6,486 (20% of £45,000 - £12,570)
Total Income Tax: £6,486
Tapering of Personal Allowance
If your income exceeds £100,000, your Personal Allowance reduces by £1 for every £2 earned above this threshold. By £125,140, it's completely lost. This creates an effective 60% tax rate on income between £100,000 and £125,140.
National Insurance (Class 2 and Class 4)
Self-employed people pay two types of National Insurance contributions (NICs):
National Insurance Credits (Formerly Class 2)
From April 2024, mandatory Class 2 NI payments were abolished. Self-employed people now receive NI credits automatically towards their State Pension if their profits exceed the Small Profits Threshold (£6,725).
You no longer need to pay anything—you still build up pension credits as long as your profits are above £6,725. If your profits are below £6,725, you can choose to pay voluntary Class 2 contributions (around £180/year) to protect your State Pension entitlement.
Class 4 National Insurance
| Profit Range | Rate 2025/26 |
|---|---|
| Below £12,570 | 0% |
| £12,570 to £50,270 | 6% |
| Above £50,270 | 2% |
💡 Practical Example
Using Rebecca's £45,000 profit from earlier:
Class 4 NI: 6% × (£45,000 - £12,570) = £1,945.80
Combined with her £6,486 Income Tax, Rebecca's total tax bill is £8,431.80 on £45,000 profit—an effective rate of about 18.7%.
Payment on Account Explained
Payment on Account often surprises new freelancers. It's an advance payment towards next year's tax bill, based on your current year's tax liability.
How It Works
- When you file your first Self Assessment return, you pay the full tax owed for that year
- HMRC also charges 50% of that amount as an advance towards next year (first Payment on Account)
- In July, you pay another 50% advance (second Payment on Account)
- The following January, you "balance" by paying any remaining tax due (or receive a refund if you overpaid)
When Payments Are Due
| Payment | Due Date | Amount |
|---|---|---|
| Balancing payment + first POA | 31 January | Previous year's balance + 50% advance |
| Second POA | 31 July | 50% advance |
The First-Year Shock
Your first Self Assessment payment can be painful—you pay the full year's tax plus half again for next year. If your tax bill is £6,000, you'd pay £9,000 in January (£6,000 + £3,000 advance).
Planning tip: Set aside 25-30% of your income throughout the year in a separate savings account. This prevents cashflow surprises at tax time.
Reducing Payments on Account
If you expect next year's income to be significantly lower (e.g., you're going employed, taking maternity leave, or winding down), you can ask HMRC to reduce your Payments on Account. Be careful—if your estimate is too low, you'll face interest charges on the underpayment.
Tax-Free Allowances
Several allowances can reduce your tax bill:
Personal Allowance: £12,570
The first £12,570 of income is tax-free. This applies to your total income, including employment income if you have both employed and freelance work.
Trading Allowance: £1,000
If your gross trading income is under £1,000, you don't need to register as self-employed or pay tax on it. If your income is over £1,000, you can either:
- Deduct the £1,000 allowance instead of actual expenses (useful for very low-expense businesses), or
- Deduct actual allowable expenses in the normal way
You can't do both—choose whichever benefits you more.
Dividend Allowance: £500
If you receive dividends (relevant if you later operate through a limited company), the first £500 is tax-free.
Savings Allowance: £1,000/£500
Basic rate taxpayers get £1,000 of savings interest tax-free; higher rate taxpayers get £500.
Allowable Expenses Overview
Business expenses reduce your taxable profit, lowering your tax bill. Allowable expenses must be "wholly and exclusively" for business purposes.
Common Allowable Expenses
- Office costs: Stationery, software subscriptions, computer equipment
- Travel: Business mileage, public transport for client meetings, parking
- Clothing: Only uniforms or protective clothing (not everyday clothing, even if worn for work)
- Professional services: Accountancy fees, legal costs, professional memberships
- Marketing: Website costs, advertising, business cards
- Insurance: Professional indemnity, business insurance
- Training: Courses that update existing skills (not courses for entirely new trades)
- Bank charges: Business account fees, payment processing fees
- Telephone and internet: Business proportion of phone and broadband bills
Working from Home
If you work from home, you can claim a proportion of household costs (heating, lighting, electricity, internet). Two methods:
- Simplified expenses: Flat rate based on hours worked at home (£10/month for 25-50 hours, £18/month for 51-100 hours, £26/month for 101+ hours)
- Actual costs: Calculate the business proportion of bills based on rooms or time spent working
Vehicle Costs
For vehicles used partly for business:
- Simplified expenses: 45p per mile for the first 10,000 miles, 25p thereafter
- Actual costs: Claim the business proportion of fuel, insurance, repairs, etc.
Important: Keep receipts for all business expenses and maintain clear records of business versus personal use.
When and How to Pay
Key Deadlines
| Deadline | What's Due |
|---|---|
| 31 January | Online Self Assessment submission + balancing payment + first Payment on Account |
| 31 July | Second Payment on Account |
Payment Methods
HMRC accepts various payment methods, but processing times differ:
- Online banking (Faster Payments): Same or next working day
- Direct Debit: Set up in advance, takes 5 working days to process
- Debit card online: Immediate
- Credit card: No longer accepted directly by HMRC
- Cheque: Allow 3 working days
- BACS: 3 working days
Top tip: Pay a few days early to ensure your payment clears before the deadline. Late payments incur interest from day one and potential penalties.
Late Payment Penalties
- 30 days late: 5% of tax unpaid
- 6 months late: Additional 5%
- 12 months late: Further 5%
Plus interest on the unpaid amount from the due date.
Spreading Payments
If you're struggling to pay, contact HMRC before the deadline. They may agree a Time to Pay arrangement, allowing you to spread payments over several months. This prevents penalties and demonstrates good faith.
💡 Practical Example
James earned £40,000 profit in 2025/26. He submitted his return in December 2026 (well before deadline) and set up a Direct Debit for 20 January 2027, ensuring the payment cleared before the 31 January deadline. He also transferred his estimated Payments on Account amount for 2026/27 into a savings account monthly to avoid a nasty surprise the following January.