UK income tax rates: A guide for self-employed

Running your own business means wearing a lot of hats and tax is one you can’t afford to ignore.

Understanding UK income tax rates helps you price confidently, plan cash flow and keep more of what you earn. This guide breaks down current UK income tax bands, with a clear focus on self‑employed people and small business owners.

In this article:

• The current UK income tax rates and bands
• How income tax works if you’re self‑employed
• What’s different for limited company owners
• How the Personal Allowance affects business owners
• Practical tax tips to help you plan ahead (not panic later)

Income tax is a tax charged by HMRC on the money you earn in a tax year. For self-employed business owners, it’s one of the most important taxes to understand because it directly affects how much of your profit you actually keep.

You pay income tax on your taxable income, which is your income after certain reliefs and allowances have been applied, most notably the Personal Allowance.

If you’re self‑employed, income tax can apply to:

• Profits from self‑employment or freelancing
• Sole trader business profits
• Director’s salary if you run a limited company
• Other income, such as rental income, dividends, or savings interest

Important: Income tax is charged on profit, not turnover. This means allowable business expenses are deducted before tax is calculated.

Income tax is calculated progressively, using tax bands. This means different portions of your income are taxed at different rates — not all at once.

For example: earning £40,000 doesn’t mean all £40,000 is taxed at 20%. Instead, part of it is tax‑free and the rest is taxed in stages.
How you pay income tax depends on how your business is structured:

• Sole traders and freelancers pay income tax through Self Assessment
• Limited company directors usually pay income tax on salary via PAYE

Understanding where income tax fits into your wider tax picture is the foundation for better planning, stronger cash flow and fewer surprises from HMRC.

UK income tax works on a banded system. This means your income is split into layers, with each layer taxed at a different rate.

The income tax bands are currently frozen and apply to the 2025/26 tax year. While the rates have not increased, frozen thresholds mean more business owners are pulled into higher tax bands as profits grow. These bands apply to England, Wales and Northern Ireland:

If you operate in Scotland, different income tax bands and rates apply, particularly for earned income.

For business owners, these thresholds matter because they influence decisions around pricing, growth and how income is taken from the business.

The Personal Allowance is the amount of income you can earn each tax year before income tax applies. For most people, this is £12,570.

If your total income stays below this level, you will not pay income tax. Once you exceed it, only the income above the allowance is taxed.

However, for higher‑earning business owners, the Personal Allowance starts to reduce once your adjusted net income exceeds £100,000. For every £2 over this threshold, £1 of your allowance is lost.

This means:

• At £100,000 you keep the full allowance
• Between £100,000 and £125,140 the allowance is gradually removed
  At £125,140 the allowance is lost completely

If you’re self‑employed as a sole trader or freelancer, income tax is based on your business profit for the tax year.

Profit is calculated by taking your total income and deducting allowable business expenses. This figure is then added to any other personal income you receive.

Self‑employed individuals usually:

• Register for Self Assessment
• Submit a tax return each year
  Pay income tax through the Self Assessment system

If your tax bill is over £1,000, you may also need to make Payments on Account. These are advance payments towards your next tax bill and can come as a surprise if you are not prepared.

For example: if your annual profit is £40,000, you would use your Personal Allowance first and then pay income tax on the remaining amount at the basic rate. Income tax is separate from National Insurance, which is calculated alongside it but paid under different rules.

If you run a limited company, income tax applies differently because the company is a separate legal entity.

Most small company directors take money out of the business using a combination of salary and dividends. Your salary is taxed through PAYE and may attract National Insurance, and dividends are taxed personally after the dividend allowance.

Income tax only applies to the salary element. Dividends are subject to dividend tax rates instead.

This structure can be more tax-efficient than sole trading, particularly as profits increase, but it also adds complexity to reporting and record‑keeping.

For limited company owners, using a tool that understands director pay, dividends and business expenses can make a real difference. Countingup supports limited companies with a business current account with built-in accounting tools, making it easier to stay on top of money and tax.

Income tax is only one part of your overall tax position. National Insurance Contributions also apply and are calculated separately.

If you are self‑employed, you may pay:

• Class 2 National Insurance if profits exceed the small profits threshold
• Class 4 National Insurance on profits above the lower limit

Tip: If you’re a limited company director, National Insurance is usually paid through salary instead. Understanding how income tax and National Insurance work together is essential for accurate budgeting and cash flow planning

While income tax cannot be avoided, it can often be reduced with proper planning and the right tools in place.

Common strategies used by small business owners include:

Claiming all allowable business expenses and keeping records organised throughout the year. This includes office supplies, software subscriptions, travel expenses and professional fees. Accurate record keeping ensures nothing is missed and can reduce your taxable profit significantly. Countingup flags tax allowances you’re entitled to, whilst SmartTax AI keeps your books nice and tidy with auto-categorisation.

Making pension contributions to reduce taxable income. Contributions to a personal or company pension scheme not only save for the future but also reduce the income that is subject to tax, effectively lowering your overall tax bill.

Reviewing business structure should be something every small business owner considers as their profits increase. As your business starts turning over more cash, moving from a sole trader to a limited company could provide more tax-efficient ways to take profits through salary and dividends.

Considering registering as a limited company? You can do this directly with Companies House for £100, but Countingup offer a company registration service too.

With Countingup, you pay a £100 upfront fee to register your company and apply for a business current account, but get this back when you spend £100 on your new Countingup card. Making your formation completely free! Start by checking if your business name is available with our company name availability checker.

Timing income and tax-deductible expenses carefully around the tax year. Delaying invoices or accelerating certain expenses can help manage which tax year income and costs fall into, smoothing tax liabilities and avoiding surprises.

Understanding UK income tax rates is about more than memorising numbers. It’s about making confident business decisions and keeping more of what you earn. Whether you’re self-employed, running a side hustle, or managing a limited company, having clarity on your finances helps you plan, grow and avoid surprises from HMRC.

Countingup combines a business current account with automated bookkeeping and real-time tax estimates. It gives self-employed people and small business owners a clear view of income, expenses and estimated tax liabilities, helping you stay organised, compliant and in control all year round.