More self-employed people and small business owners could be pulled into the 40 per cent tax bracket as wages go up but income tax thresholds remain the same. And as HMRC predicts that 500,000 more people will pay the higher rate this tax year, it’s a good time to make sure you understand how much income tax you’ll pay and ways to reduce your tax bill.
UK income tax is charged on income and earnings made by individuals in any given tax year. The amount you pay is based on different tax thresholds, one of which is the 40 per cent threshold.
The rates and thresholds are set by the UK government (and the Scottish Parliament), and tax is collected by HMRC. These rates can change with announcements by the chancellor.
Higher rate income tax – what’s the 40% threshold?
The 40 per cent tax bracket applies to anyone who lives in England, Wales, and Northern Ireland.
Anyone who earns over £50,271 a year will fall into this higher rate 40 per cent tax bracket. You won’t pay 40 per cent on all of this, just anything over that amount. This is because income tax is calculated based on different thresholds.
The higher rate of tax is paid on earnings between £50,271 and £125,140. Later on in this article we’ll cover the tax rates for people in Scotland.
If you’re self-employed or a small business owner and registered for Self Assessment, you’ll pay your income tax by filing your tax return.
Will the 40% tax bracket increase?
Experts are calling for the higher rate income tax bracket to increase to £75,000. This is because wages have risen while thresholds have remained the same, meaning more people are dragged into paying a higher rate of tax.
The number of people paying the higher rate is expected to rise by 500,000 this tax year, according to HMRC figures. For 2025-26, more than seven million people are likely to fall into the 40 per cent tax bracket.
Change is on the way, but businesses will have to wait a few more years. In October 2024, the Chancellor Rachel Reeves announced that income tax thresholds would remain frozen until the 2027-28 tax year. At which point, tax rates will rise inline with inflation, which could mean fewer self-employed people are paying a higher rate of tax
A complete guide to income tax for the self-employed
This guide covers everything you need to know about current income tax rates and bands for the self-employed, including:
What is self-employed income tax?
You pay income tax and National Insurance through Self Assessment by 31 January each year.
This means you need to record your earnings and let HMRC know what you owe in an annual tax return.
You can also deduct business expenses to pay less tax, which means the self-employed pay income tax on trading profits rather than total income.
Keep in mind that you’ll also need to pay National Insurance through your Self Assessment, too.
If you’re employed, your income tax will be deducted at source from your payslip. Your tax code is used to tell your employer how much to deduct from your wages.
How is the self-employed tax rate calculated?
Self-employed income tax rates are the same as tax rates for employees.
Most people get a standard tax-free personal allowance, with income tax thresholds, rates, and bands applying to everybody.
The personal allowance has been frozen at £12,570 until 2028. So it’s worth remembering that this could lead to a higher tax bill if your earnings increase (for example, if you grow your business or make more money as a result of rising prices).
Your income tax personal allowance changes if your adjusted net income (income before any personal allowances and less certain tax reliefs) is above £100,000. It goes down by £1 for every £2 above £100,000. So, if you earn £125,140 or above, your personal allowance is zero.
It’s also worth noting that high earners that pay income tax through PAYE also have to file a Self Assessment tax return (even though they’re employed). The income tax threshold for employees having to file a Self Assessment increased to £150,000 from 2023-24.
Example income tax calculation
You don’t pay a single income tax rate on your trading profits. Instead, you pay the appropriate rate on your trading profits within each bracket.
For example, if you’re filling out your next Self Assessment in January 2026 and your trading profits were £50,500 in 2024-25, you pay:
- 40 per cent on £230
- no income tax on £12,570 of your trading profits
- 20 per cent on the next £37,700
Income tax rates and bands
When working out your income tax as part of your self-employed tax, you’ll need to look at the rates for where you live in the UK. This is because income tax is a devolved responsibility by the UK government, so there are different rates and bands depending on your location.
What percentage is income tax in England, Wales, and Northern Ireland?
These are the current rates and bands for 2025-26 (and for the previous tax year 2024-25):
| 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% |
Here’s an example of how your personal allowance decreases above £100,000:
- you need to pay tax on £110,000 of earnings
- you pay the higher rate (40 per cent) on £10,000 (£4,000)
- you also pay the higher rate (40 per cent) on your £5,000 lost personal allowance (£2,000)
What are the Scottish income tax rates?
Income tax is devolved to the Scottish Parliament, which means it sets the rates and thresholds. Scottish self-employed tax rates are detailed in the table below.
| Band | Taxable income | Tax rate |
| Personal allowance | Up to £12,570 | 0% |
| Starter rate | £12,571 to £14,876 | 19% |
| Basic rate | £14,877 to £25,561 | 20% |
| Intermediate rate | £25,562 to £43,662 | 21% |
| Higher rate | £43,663 to £75,000 | 42% |
| Advanced rate | £75,001 to £125,140 | 45% |
| Top rate | Over £125,140 | 48% |
Read more: Scottish tax rates: what you need to know
How much tax do I pay as a self-employed person?
This is an example self-employed tax calculation for 2024-25 if someone has:
- no income from employment through PAYE
- £58,000 in self-employed income
- £5,000 in business expenses
- been self-employed for the full tax year
These rates and allowances are based on current frozen UK income tax rates and thresholds (assuming a personal allowance of £12,570). This tax calculation includes income tax and self-employed National Insurance:
- £7,540 (20 per cent) on self-employment income between £12,570 and £50,270
- £1,092 (40 per cent) on self-employment income between £50,270 and £53,000 (£58,000 less £5,000 business expenses)
- Class 4 National Insurance at six per cent on £37,700 – which is £2,262
- Class 4 National Insurance at two per cent on the remainder of income – which is £55
- No Class 2 National Insurance
This comes to a total income tax and National Insurance bill of £10,949.
The self-employed person makes £42,051 after tax and expenses. This calculation was completed using an income tax calculator for the self-employed from Tax Scouts.
The example above is just an illustration and your personal circumstances will be different. If you’re not sure, speak to a professional to help with your calculations.
What is the basic rate of tax?
The basic tax rate is the main rate of income tax paid in the UK. If your self-employed tax code is listed as the basic tax rate, it means that your income is between £12,570 (the personal allowance) and £50,270 (the higher rate tax threshold) and you’ll pay 20 per cent tax on this.
How to reduce your tax bill
There are a few ways you can reduce how much tax you pay if your income is pushing you into the higher rate tax bracket:
- Claim all the business expenses you can – you can deduct allowable business expenses to calculate your total trading profits, which will reduce the amount you have to pay income tax on.
- Pay into a pension – contributing to a pension reduces your taxable income as it’s paid into a scheme before tax.
- Open an ISA or tax-efficient savings account – save £20,000 into an Individual Savings Account (ISA) without paying income tax or capital gains tax, or maximise your £1,000 allowance on tax-free interest in a savings account (for basic rate taxpayers).
- Incorporate your business – it may be more tax efficient if you register your business as a limited company. This is usually as some of your income would likely be from dividends, which is taxed differently.
This is a guide and isn’t financial advice. Always speak to an accountant or professional financial adviser to discuss your circumstances.
What business expenses can I claim?
Generally, you can claim expenses that are wholly and exclusively for business purposes – for example, accounting, business insurance, a business phone, and so on.
Make sure you’re making use of these deductions as it will reduce your tax liability.
You can read more about reducing income tax by claiming expenses in our guide to allowable expenses for the self-employed.
There’s also lots of HMRC guidance about business expenses and you should check whether there’s any information from trade bodies specific to your industry.
How do I file a self-employment tax return?
You need to complete an annual Self Assessment tax return by 31 January each year (it’s earlier if you file on paper, but HMRC is gradually making the entire tax system digital). You’ll also need to pay any tax due by 31 January.
You register for Self Assessment when you first go self-employed. There are penalties for doing this late, so make sure that you register promptly.
You’ll receive a notice to file each year. You can file your return at any point from then – there’s no reason to leave it until the last minute. Most people file their Self Assessment tax return online. You’ll need a Government Gateway login if you haven’t got one yet, so get this sorted as soon as possible.
How do you pay tax when self-employed?
Employees pay tax automatically through PAYE, but self-employed people need to pay after filing their Self Assessment tax return. This also applies to company directors. HMRC should calculate your tax bill for you.
If you’re struggling to pay your tax bill, don’t put off speaking to HMRC. They might be able to work out a payment plan for you to pay your bill in instalments – this is called a Time to Pay arrangement.
But if you can pay your tax bill by 31 January, you should. HMRC will charge you interest on late payments, so a payment plan will end up costing you more in the long run.
You should also remember payment on account. Under this system, you pay 50 per cent of your last tax bill towards your next year’s liability. There’s also a payment on account due in July. Payments on account can be a surprise in your first year, but it’s important that you budget for them.
Self-employed tax – FAQs
What information do I need for a self-employment tax return?
When filing a self-employed tax return, you’ll need to answer questions about your business and all your sources of income. You can choose to write expenses as a single figure, or if your accounts are more complicated, you can break them down. Good record keeping throughout the year can help when it comes to submitting your tax return.
If you aren’t sure about income tax or filing your tax return, it’s a good idea to get help from a qualified professional.
How much can I earn as a self-employed person before declaring tax?
You need to pay income tax on any earnings over the personal allowance, which is currently £12,570.
There’s also a £1,000 tax-free trading allowance for sole traders before you start declaring your earnings to HMRC.
How much do I need to earn to pay 20% tax?
The current basic rate tax bracket means you’ll pay 20 per cent tax on earnings between £12,571 and £50,270. You won’t be taxed on any earnings up to £12,570 as this is your tax-free personal allowance.
How much can I earn before I start paying 40% tax?
Income tax is based on your annual income rather than monthly. You won’t pay 40 per cent tax until you’re earning over £50,271 (and it won’t be 40 per cent on all your earnings, just anything over the higher rate threshold).
If you want to know how much you can earn a month before you start paying the higher rate of income tax, it usually works out to around between £4,189 and £12,500 a month.
How can you avoid 40% tax in the UK?
It’s not always possible to avoid paying 40 per cent tax, but you might be able to make smart decisions to reduce your taxable income, keeping you out of the higher tax bracket.
If you’re earning £50,271 or more then you’ll be liable to pay 40 per cent tax on some of your income. Contributing to a pension, investing in an ISA, and claiming your allowable business expenses are just a few ways you can reduce your tax bill.
Pensions aren’t subject to income tax, so paying into one means you may be able to stay in a lower tax bracket.
How does self-employed tax work?
Self-employed tax works the same way as employed tax. You’ll use the same tax rates to work out how much tax you owe. The only difference is, instead of your taxes coming straight out of your paycheck, you’ll submit a Self Assessment tax return each year to pay your taxes.
How do you pay tax when self-employed?
When you become self-employed, you’ll register with HMRC. You’ll then need to keep track of your finances throughout the year and submit a Self Assessment tax return by the 31 January each year.
More tax guides for the self-employed
Did you know business insurance is tax deductible?
Business insurance (such as public liability insurance) is an allowable expense you can claim while filing your tax return – while also helping to protect your small business. Why not get a tailored quote for business insurance today and start the new tax year off right?