Can I deduct pension contributions from self-employed profits?

Pension contributions don't reduce your taxable trading profit directly, but they do extend your basic-rate band. Higher- and additional-rate taxpayers can claim the extra relief through their Self Assessment return.

Should I use the trading allowance or actual expenses?

Use the £1,000 trading allowance only if your actual expenses are less than £1,000 — otherwise claim actual expenses to get a bigger deduction. You can't combine the two for the same trade.

When does the 40% tax rate kick in for a sole trader?

Once your taxable income (after personal allowance and any pension extension) exceeds £37,700 above the personal allowance — roughly £50,270 of total income for someone with the standard personal allowance and no pension top-up.

Do I include drawings in my expenses?

No. Drawings (money the sole trader takes out for personal use) aren't an expense — they're a withdrawal of profit. Only costs incurred wholly and exclusively for the trade are deductible.

Worked Examples

Example: Self Assessment for a Sole Trader

A worked Self Assessment example for a UK sole trader in 2025/26 covering profit, Income Tax, Class 4 NI and the final tax bill.

1 min read·Updated 10 November 2026

Quick answers

How is a sole trader's tax calculated?

Take gross self-employed income, deduct allowable expenses to get trading profit. Apply the personal allowance, then Income Tax bands (20%/40%/45%) and Class 4 National Insurance (6% from £12,570 to £50,270, then 2%). Pay through Self Assessment by 31 January.

What are payments on account for a sole trader?

Once your tax bill exceeds £1,000, HMRC takes two payments on account towards next year's bill — each equal to 50% of the current year's tax. They're due 31 January (with the balancing payment) and 31 July.

Do sole traders pay National Insurance on profits?

Yes. Class 4 NI is charged at 6% on profits between £12,570 and £50,270 and 2% above. Class 2 became voluntary from 2024/25 — those with profits over £6,845 for 2025/26 still get a State Pension credit automatically.

Sara is a freelance graphic designer trading as a sole trader for the 2025/26 tax year.

Her figures

Gross self-employed income: £58,000
Allowable expenses: £8,000
Personal pension contributions: £2,400 (gross £3,000)
No other income.

Step 1: Trading profit

Income            £58,000
Less expenses    −£8,000
──────────────────────────
Trading profit   £50,000

Step 2: Income Tax

Personal allowance for 2025/26: £12,570. Pension contributions extend the basic-rate band by £3,000.

Taxable income       £50,000 − £12,570 = £37,430

Basic-rate band: £37,700 + £3,000 = £40,700
All £37,430 falls in the basic-rate band.

Income Tax: £37,430 × 20% = £7,486

Step 3: Class 4 National Insurance

Class 4 NI on profits between £12,570 and £50,000:
(£50,000 − £12,570) × 6% = £37,430 × 6% = £2,246

(No 2% band because profits don't exceed £50,270.)

Step 4: Total bill and payments on account

Income Tax       £7,486
Class 4 NI       £2,246
─────────────────────────
Total due       £9,732

Because the bill is over £1,000, Sara also pays payments on account for 2026/27:

31 January 2027: £9,732 (balancing) + £4,866 (1st payment on account) = £14,598
31 July 2027: £4,866 (2nd payment on account)

Step 5: Filing

Sara files her SA100 + SA103S online by 31 January 2027, using the trading allowance check (her expenses exceed £1,000, so claiming actual expenses is better).

Lessons

Pension contributions quietly extended Sara's basic-rate band — useful if her profit had been higher.
Payments on account mean her first January bill is roughly 1.5× the actual liability — plan cash-flow accordingly.
Class 4 NI kicks in alongside Income Tax for the self-employed.

This is general guidance for the 2025/26 UK tax year and is not personal tax advice. Always check the latest figures on GOV.UK or speak to a qualified accountant for your situation.

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