Employed vs self-employed

Employees normally pay Income Tax through PAYE and Class 1 National Insurance through payroll. For most employees in 2026/27, the main Class 1 employee rates are 8% on earnings between the primary threshold and upper earnings limit, then 2% above the upper earnings limit.

A self-employed sole trader pays Income Tax on taxable business profit. Class 4 National Insurance is normally 6% on profits above £12,570 up to £50,270 and 2% above £50,270 for 2026/27. If profits are at least £7,105, Class 2 is generally treated as paid to protect the National Insurance record rather than charged as a compulsory weekly amount.

Self-employed people can deduct allowable business expenses when working out taxable profit. Common categories include office costs, business travel, staff costs, insurance, business premises, marketing and qualifying training.

Only the business element is normally deductible where a cost has both business and personal use. If you use the £1,000 trading allowance instead, you cannot also deduct actual business expenses against the same trading income.

Employment can include benefits that are not reflected in a simple take-home pay comparison. Eligible employees can have paid annual leave and may qualify for statutory payments such as sick pay. Many workers who meet the automatic enrolment criteria are also enrolled into a workplace pension.

In most automatic enrolment schemes, the statutory minimum employer contribution is 3% of qualifying earnings and the total minimum contribution is 8%, although scheme rules can require or allow more. Self-employed people arrange and fund their own pension and protection.

You can be employed and self-employed at the same time. Your employer deducts Class 1 National Insurance from employment earnings, and you may also pay Class 4 National Insurance on self-employed profits.

The amount of National Insurance due can depend on your combined circumstances. HMRC works out any adjustment after the Self Assessment return is filed where necessary.

If your gross trading income is more than £1,000 for a tax year, you generally need to register for Self Assessment, subject to the detailed rules and exceptions. Registration is normally required by 5 October after the end of the relevant tax year if you need to file and are not already registered.

For the 2025/26 tax year, the paper filing deadline is 31 October 2026 and the normal online filing and payment deadline is 31 January 2027. Different deadlines can apply in some circumstances.

Making Tax Digital for Income Tax started from 6 April 2026 for qualifying sole traders and landlords whose 2024/25 qualifying income was over £50,000, unless an exemption applies. Qualifying income is broadly gross self-employment and property income before expenses.

The rollout continues in stages. The threshold is more than £30,000 from April 2027 based on the relevant earlier return, and more than £20,000 from April 2028. People within MTD need compatible software, digital records and quarterly updates.

A limited company is a separate legal entity and brings different tax, legal and filing responsibilities. It can be relevant where you want to limit personal liability, take on investors, build a business that is separate from you, or use a company structure for commercial reasons.

A company is not automatically more tax efficient. Corporation Tax, salary, dividends, employer National Insurance, pension contributions, administration and your wider plans all affect the result. Compare the full position before changing structure.