Over the past decade, self-employment has become one of the fastest-growing sectors in the UK. Whether launching a consultancy career or running a “side hustle” alongside a PAYE job, more people than ever are navigating the complexities of the UK tax system. While the flexibility of being your own boss is attractive, many individuals underestimate their tax obligations, often believing it is only a concern for those with high earnings.

In reality, falling foul of HMRC deadlines or failing to budget for a tax bill can create significant financial strain. Income Tax, National Insurance Contributions (NICs), and Self Assessment registration are all triggered at different thresholds. Understanding these is vital to staying compliant, and the team at Reed & Co. is here to guide you through the process.

What Is the Personal Allowance?

The Personal Allowance is the amount of income you can earn in a tax year before you start paying Income Tax. For the 2025/26 tax year, the standard Personal Allowance remains frozen at £12,570.

If your total taxable income stays below this figure, you generally will not owe Income Tax. However, it is important to remember that this allowance is cumulative across all income sources. If you have a part-time job under PAYE and a side business, both incomes are added together to see if you have exceeded the £12,570 limit.

For example, if your self-employment profit is £13,000, you only pay Income Tax on the portion above the threshold (£430). This “Basic Rate” is currently set at 20%.

The £1,000 Trading Allowance: When Do You Need to Register?

One of the most frequent causes of confusion is the Trading Allowance. If your total gross income (revenue) from self-employment is £1,000 or less in a tax year, you do not need to tell HMRC or pay any tax on it.

However, as soon as your total income exceeds £1,000, you must register for Self Assessment, even if your expenses mean you haven’t made a profit and won’t owe any tax. Reporting your income is a legal requirement that is separate from the act of paying the tax itself.

National Insurance Contributions (NICs) in 2025/26

National Insurance underwent significant reform recently. It is no longer as simple as it once was, and for many, NICs start at a different level than Income Tax.

Class 2 NICs (Now Abolished for Most)

As of April 2024, the government effectively abolished mandatory Class 2 NICs for those with profits above £12,570. You still receive the “benefit” of the contribution (toward your State Pension) without having to pay the flat weekly fee. If your profits are below £6,725, you can still choose to pay voluntary Class 2 contributions to protect your pension record.

Class 4 NICs

Class 4 NICs are calculated as a percentage of your annual profit. For the 2025/26 tax year, you start paying Class 4 NICs once your profits exceed the Lower Profits Limit of £12,570.

Earnings vs Tax & NIC Breakdown (2025/26 Estimates)

Note: Calculations are based on standard allowances and the current 6% Class 4 rate. Individual circumstances may vary.

Profit vs. Turnover: What Income Counts?

It is a common mistake to think you are taxed on everything you “invoice.” In reality, you are taxed on your profit.

• Turnover (Revenue): The total amount of money coming into your business.
• Allowable Expenses: Costs incurred wholly and exclusively for business purposes (e.g., software, office supplies, certain travel).
• Taxable Profit: Turnover minus Allowable Expenses.

For example, if you earn £18,000 but spend £6,000 on valid business costs, your taxable profit is £12,000. Because this is below the £12,570 Personal Allowance, you would owe £0 in Income Tax.

Key Deadlines to Remember

Failing to register or file on time results in automatic penalties, even if your tax bill is zero.

• 5 October: Deadline to register for Self Assessment (following the end of the tax year you started working).
• 31 January: Deadline to file your digital tax return and pay the balance of tax and NICs due.

How Reed & Co. Can Help

Navigating thresholds, payments on account, and allowable expenses can be overwhelming for those new to self-employment. At Reed & Co., we provide professional support to ensure you never pay more tax than necessary while staying firmly on the right side of HMRC.

If you are unsure how much to set aside for your next bill or need help filing your first return, contact the team at Reed & Co. today for expert, friendly advice.