How HMRC Calculates Your Tax Bill on Self Assessment (Part 5)
How HMRC calculates your self assessment tax bill: income tax at marginal rates, National Insurance for the self-employed, payments on account explained, and how to reduce your July bill.
How HMRC arrives at your tax bill
Your self assessment return is not just a declaration of one type of income. It is a complete picture of everything you earned in the tax year from every source. HMRC's calculation engine totals all income — employment, self-employment profits, rental profits, dividends, savings interest and anything else — applies your Personal Allowance, runs each pound through the relevant tax bands, adds National Insurance, deducts any tax already collected at source (PAYE, withholding tax), and arrives at what you actually owe.
Understanding this process in detail lets you budget accurately, avoid surprises, and use legitimate planning tools — like pension contributions — to reduce the final number before you file.
This is Part 5 of the UK Self Assessment From Scratch series. Parts 1 to 4 covered whether you need to file, how to register, what records to keep, and the key deadlines. Here we go through the calculation itself — income tax, National Insurance, the payments on account system, and what to do if you cannot pay.
Income Tax Calculator
Work out how much income tax you owe using the latest 2025/26 UK tax bands.
Open Income Tax calculatorIncome tax: the basic calculation
Personal Allowance and tax bands
Every UK taxpayer (who is UK resident and earns below £100,000) receives a tax-free Personal Allowance of £12,570 for 2025/26. Your taxable income is everything above that figure.
Income is then taxed at marginal rates through the following bands for England, Wales and Northern Ireland:
| Taxable income (above PA) | Rate |
|---|---|
| Up to £37,700 | 20% (Basic rate) |
| £37,701 to £125,140 | 40% (Higher rate) |
| Above £125,140 | 45% (Additional rate) |
The bands are applied to the slice of income that falls within each — not to all income at the higher rate. If your taxable income is £50,000, you pay 20% on the first £37,700 and 40% on the remaining £12,300.
Scotland operates a six-band system for non-savings, non-dividend income (including self-employment profits and rental income): 19% (starter), 20% (basic), 21% (intermediate), 42% (higher), 45% (advanced) and 48% (top). Scottish taxpayers file the same SA100 return but tick the Scottish taxpayer box — the system applies the correct rates automatically.
How self assessment consolidates all income
The crucial point for people with mixed income is that self assessment stacks all income types together to determine which band applies:
- Non-savings income first (employment earnings, self-employment profits, rental profits)
- Savings income next (interest above the Personal Savings Allowance)
- Dividend income on top (above the £500 Dividend Allowance)
So if you earn £30,000 from employment and £20,000 from self-employment, your total taxable income is £50,000. Your employment income fills most of the basic rate band; your self-employment profits overflow into the higher rate band. Your overall income tax bill will be higher than if either income were assessed in isolation — and PAYE on your employment will not have accounted for the self-employment profits at all.
This stacking effect is why self assessment exists: PAYE alone cannot handle multiple income sources accurately.
Self-Employed Tax Calculator
Calculate income tax, Class 2 and Class 4 National Insurance for self-employed and sole traders for 2025/26.
Open Self-Employed Tax calculatorNational Insurance for the self-employed
Employed people pay Class 1 NI, which is deducted automatically by their employer. The self-employed pay two separate classes:
Class 4 NI
Class 4 is the main NI charge on self-employed profits. For 2025/26:
| Profit level | Rate |
|---|---|
| Below £12,570 | 0% |
| £12,570 to £50,270 | 6% |
| Above £50,270 | 2% |
Class 4 NI is calculated and collected through your self assessment return — you do not make separate payments. It forms part of your total January bill.
Note that Class 4 rates are lower than Class 1 employee rates (8% and 2%). This reflects the absence of an employer contribution. Employees effectively receive NI contributions from their employer at 13.8% on earnings above the secondary threshold — the self-employed receive no equivalent.
Class 2 NI — now voluntary
From April 2024, Class 2 NI was abolished as a mandatory charge. Previously, all self-employed people with profits above the Small Profits Threshold paid Class 2 at a flat £3.50 per week (£182 per year), collected through self assessment.
Class 2 remains important because it is one of the cheapest ways to build a qualifying year for the State Pension. Each qualifying year adds to your entitlement — you need 35 qualifying years for the full new State Pension (£221.20 per week in 2025/26).
If you choose to pay Class 2 voluntarily, you can do so via your self assessment return. Tick the relevant box in the NI section and the £182 is added to your bill. For most self-employed people earning at least the Small Profits Threshold (£6,845 for 2025/26), this remains worth paying. Compare £182 per year to the value of one additional State Pension qualifying year — at current rates, each qualifying year is worth approximately £6.32 per week, or £328 per year in retirement. The payback period at these figures is under seven months.
Comparing NI classes
| Class | Who pays | Rate | How collected |
|---|---|---|---|
| Class 1 employee | PAYE employees | 8% / 2% | Via payroll |
| Class 1 employer | Employers | 13.8% | Via payroll |
| Class 4 | Self-employed | 6% / 2% | Via SA return |
| Class 2 | Self-employed (voluntary) | £3.50/week | Via SA return |
National Insurance Calculator
Calculate your National Insurance contributions for 2025/26.
Open National Insurance calculatorPayments on account explained
One of the most confusing aspects of self assessment for new filers is the payments on account system. Once your annual tax bill exceeds a threshold, HMRC does not simply let you pay once a year. Instead, it requires advance payments towards the following year's bill.
When payments on account apply
Payments on account are required when both of the following are true:
- Your total self assessment tax bill for the year exceeds £1,000
- Less than 80% of your tax was collected at source (i.e. via PAYE)
If the majority of your income is PAYE employment and your self assessment bill relates only to a small amount of additional income, you may stay below the £1,000 threshold and escape payments on account entirely. But most people with meaningful self-employment or rental income will be above it.
How payments on account work
Once you are in the payments on account system, each year involves three payments:
| Payment | Amount | When due |
|---|---|---|
| First payment on account | 50% of previous year's bill | 31 January (same as filing deadline) |
| Second payment on account | 50% of previous year's bill | 31 July |
| Balancing payment | Actual bill minus POAs already paid | 31 January following year |
The payments on account are based on the previous year's bill, not an estimate of the current year. If your income is stable, they will be roughly right. If your income rises, you will have a balancing payment in January. If your income falls, you will have overpaid and receive a refund — or the credit reduces your next POA.
The January double-payment trap
The worst moment for many first-time self assessment filers arrives on 31 January of year two. On that day they must pay:
- The balancing payment for the previous tax year (actual bill minus POAs already paid)
- The first payment on account for the current tax year
In practice this means that if your first-ever self assessment bill is, say, £8,000, the very first January payment will be £12,000: the full £8,000 bill plus the first £4,000 POA for the coming year. Knowing this in advance and setting money aside from the very first day of self-employment is critical.
Worked example: Sarah the freelance consultant
Sarah is a freelance marketing consultant. In 2025/26, her total self-employed profit is £45,000 and she has no other income.
Step 1: Income tax
| Calculation | Amount |
|---|---|
| Total profit | £45,000 |
| Less Personal Allowance | £12,570 |
| Taxable income | £32,430 |
| Income tax at 20% | £6,486 |
Sarah's income falls entirely within the basic rate band (taxable income is below the £37,700 boundary).
Step 2: Class 4 NI
| Calculation | Amount |
|---|---|
| Profits above £12,570 threshold | £32,430 |
| Class 4 NI at 6% | £1,946 |
| Profits above £50,270 threshold | £0 |
| Additional Class 4 NI at 2% | £0 |
| Total Class 4 NI | £1,946 |
Step 3: Class 2 NI (voluntary)
Sarah chooses to pay Class 2 to protect a qualifying year: £182.
Total bill for 2025/26: £6,486 + £1,946 + £182 = £8,614
Step 4: Payments on account
Sarah's bill exceeds £1,000 and none of it was collected at source, so payments on account apply.
| Payment | Date | Amount |
|---|---|---|
| First POA (50% of £8,614) | 31 January 2027 | £4,307 |
| Second POA (50% of £8,614) | 31 July 2027 | £4,307 |
| Balancing payment | 31 January 2028 | Actual 2026/27 bill minus £8,614 |
On 31 January 2027, Sarah pays both the full 2025/26 bill (£8,614) and the first POA (£4,307). Her total January 2027 payment is £12,921.
Reducing payments on account using SA303
If Sarah knows that her 2026/27 income will be significantly lower — say, she expects profit of £38,000 rather than £45,000 — she does not have to make POAs based on the higher 2025/26 bill. She can apply to reduce them.
How to submit SA303
- Log in to HMRC Online Services
- Navigate to Self Assessment → your account
- Select "Reduce payments on account"
- Enter your realistic estimate for the current year's tax liability
- HMRC updates your POA amounts immediately
There is no paper SA303 form to post — the online process replaces it.
The risk of over-reducing
If Sarah reduces her POAs and then actually earns £44,000 in 2026/27, she will owe the shortfall (the difference between reduced POAs paid and the actual 50% share) plus 7.5% interest per annum from the original due date. HMRC does not impose a penalty for this, but the interest starts accruing immediately — there is no 30-day grace period for underpaid POAs.
The message: reduce only to a realistic estimate. Guessing aggressively low to improve cash flow is tempting but costs money in interest.
Interest and penalties on late payment
From 1 February 2026, HMRC's late payment interest rate on self assessment is 7.5% per annum (Bank of England base rate plus 2.5%). Interest begins accruing from the day after the payment due date — there is no interest-free grace period.
Penalties work differently from interest:
| Penalty | When triggered |
|---|---|
| 5% surcharge | Tax unpaid 30 days after due date |
| Further 5% surcharge | Tax unpaid 6 months after due date |
| Further 5% surcharge | Tax unpaid 12 months after due date |
These surcharges apply to the unpaid tax, not the interest. On a £5,000 unpaid balance, the three surcharges alone total £750 — before interest is added. Filing on time and arranging Time to Pay before the 30-day mark avoids all three penalty stages.
Time to Pay: what to do if you cannot afford the bill
HMRC's Business Payment Support Service exists for exactly this situation. Call 0300 200 3835 as early as possible — before the payment due date if you can, and certainly before the 30-day penalty mark.
Self-serve Time to Pay
If your self assessment debt is:
- Under £30,000, and
- Within 60 days of the payment due date
...you can set up a Time to Pay instalment plan entirely online without phoning, via your Personal Tax Account or HMRC Online Services. The process takes about 10 minutes. You choose the number of instalments and HMRC presents the total including interest.
What Time to Pay covers
- Instalments spread over a period HMRC agrees (typically up to 12 months, sometimes longer in hardship cases)
- No credit check, no impact on your credit score
- Interest continues to accrue on the outstanding balance at 7.5% — Time to Pay does not pause interest
- The 30-day and 6-month surcharges are typically suspended while you are in an agreed plan and adhering to it
What HMRC expects
HMRC expects you to have made a genuine attempt to pay and to have genuine difficulty meeting the full amount by the due date. They will ask about your income, outgoings, and assets. Being unable to pay because you spent the tax money on business expansion or personal spending is treated differently from genuine cash flow difficulty — they can and do refuse Time to Pay in the former case.
The July payment: the surprise that catches new filers
Many people entering self assessment for the first time go through the January filing, understand the balancing payment, pay up, and feel done. Then July arrives.
The July payment on account — 50% of your previous year's bill — is not optional. It is a legally required payment under TMA 1970 s59A. Missing it triggers interest from 1 August at 7.5%, and then the 30-day surcharge if still unpaid on 31 August.
The solution is simple but requires discipline from day one: set aside 25–35% of every payment you receive into a dedicated tax savings account. This is not a fixed rule — higher earners in the 40% band may need to set aside more. But for a basic rate self-employed person with Class 4 NI, the effective total tax rate on profits between £12,570 and £50,270 is approximately 26% (20% income tax + 6% Class 4). Setting aside 30% builds a buffer for Class 2 and the POA system.
Many self-employed people open a dedicated savings account (a high-interest easy-access ISA or regular savings account) as their "tax pot". Every time client money lands, they immediately transfer the set-aside amount. This removes the temptation to spend it and ensures the January and July payments are funded well in advance.
Dividend and savings interest tax on top
The worked example above focuses on self-employment, but remember that your self assessment return captures all income. If Sarah also had savings interest of £3,000 in 2025/26 (above her £1,000 PSA as a basic rate taxpayer), she would pay a further £400 income tax (20% on £2,000 excess). If she received £1,000 in dividends (above the £500 allowance), she would pay a further £43.75 (8.75% dividend rate on £500 excess). These additions increase her total bill and therefore increase her payments on account base for the following year.
Running the numbers in advance using a self-employed tax calculator is the best way to produce a realistic estimate for each year.
What comes next
Part 6 of this series covers the practicalities of filling in and submitting your return online: which sections of the SA100 apply to you, how to enter your figures correctly, and what to check before you hit submit.
Read Part 6: How to Complete and Submit Your Self Assessment Return Online →
Frequently asked questions
How does National Insurance work for the self-employed in 2025/26?
Self-employed people pay Class 4 National Insurance on their profits: 6% on profits between £12,570 and £50,270, and 2% on profits above £50,270. Class 2 NI was abolished as a mandatory charge from April 2024 but can still be paid voluntarily at £3.50 per week (£182 per year) to protect qualifying years for the State Pension. Both are calculated and paid through your self assessment return.
Can you reduce your payment on account if your income has fallen?
Yes. If you know your current year's income will be lower than last year's, you can apply to reduce your payments on account using form SA303, available online via HMRC's Self Assessment portal under 'reduce payments on account'. Be cautious: if you reduce the payments too aggressively and your actual bill is higher than estimated, HMRC charges 7.5% interest per annum on the shortfall from the original due date.
What if you can't afford your self assessment tax bill?
Contact HMRC's Business Payment Support Service on 0300 200 3835 as early as possible. If your debt is under £30,000 and you are within 60 days of the payment due date, you may be able to set up a Time to Pay arrangement online without calling. HMRC does not charge a penalty for entering Time to Pay, but interest continues to accrue on the outstanding balance at 7.5% per annum from February 2026.
What is the July payment on account and why does it catch people off guard?
The July payment on account is the second of two advance payments towards your next year's tax bill. It equals 50% of your previous year's total tax liability and falls due on 31 July — just six months after the January payment. Many first-time self assessment filers are unprepared for it because they focus on the January deadline without realising another significant payment follows six months later. Setting aside 25–35% of every payment you receive into a separate 'tax pot' from the start prevents this shock.
How is National Insurance different for PAYE employees versus the self-employed?
PAYE employees pay Class 1 National Insurance: 8% on earnings between £12,570 and £50,270, and 2% above £50,270, deducted automatically by their employer. The self-employed pay Class 4 NI at lower rates (6% and 2%) but receive no employer contribution. This means the self-employed pay a lower NI rate overall but must calculate and pay it themselves via their self assessment return. Class 1 is also what builds entitlement to contributory benefits such as Statutory Sick Pay and Statutory Maternity Pay, which the self-employed cannot access.
Try the calculators
Self-Employed Tax Calculator
Calculate income tax, Class 2 and Class 4 National Insurance for self-employed and sole traders for 2025/26.
Income Tax Calculator
Work out how much income tax you owe using the latest 2025/26 UK tax bands.
National Insurance Calculator
Calculate your National Insurance contributions for 2025/26.
Related reading
UK Self Assessment From Scratch — Part 1: Do You Even Need to File?
Most UK workers never need to do a Self Assessment. But about 12 million do. Here's the precise list of trigger conditions for 2024/25 and 2025/26 — and how to register if it turns out you do.
Self Assessment: Do You Actually Need to File? The Complete UK Checklist (Part 1)
The complete checklist for whether you need to file a self assessment tax return in the UK: employment income, rental, freelance, savings interest, CGT, dividends and more.
UK Self Assessment From Scratch — Part 2: UTR and Government Gateway Setup
Step-by-step guide to registering for Self Assessment, getting your UTR (Unique Taxpayer Reference) number, setting up your HMRC Government Gateway account and what to do if things go wrong.