UK Tax Year 2026/27: Self-Employment Tax Changes

The Self-Employed Tax Framework in 2026/27

Self-employed income (sole traders, freelancers, partners in general partnerships) is taxed via Self Assessment. Key taxes:

1. Income Tax — same rates and bands as employees, applied to taxable profits
2. Class 4 NI — additional NI on trading profits
3. No Class 2 NI (abolished April 2024)

Tax and NI on self-employed profits 2026/27

The self-employed pay slightly less NI than employees (6% vs 8% in the main band) but receive no employer NI contribution toward their State Pension or benefits — they must fund equivalent State Pension access themselves.

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Making Tax Digital for Income Tax (MTD ITSA) — April 2026

This is the most significant administrative change for self-employed people in 2026/27.

What MTD ITSA requires

• Digital record-keeping: all income and expenses must be recorded in HMRC-approved software
• Quarterly submissions: 4 quarterly summary updates submitted to HMRC each year (approximately April–June, July–September, October–December, January–March)
• End-of-period statement (EOPS): annual statement replacing the main body of the SA return
• Final declaration: replaces the existing SA return, submitted by 31 January after the tax year

Mandatory rollout timeline

For 2026/27, if your gross self-employed income OR rental income (or combined) exceeds £50,000, you must be using MTD-compatible software and making quarterly submissions. Paper SA returns and HMRC's online SA filing are no longer available for this group.

What software is required

HMRC maintains a list of approved software. Options include:

• Quickbooks, Xero, FreeAgent: full-featured accounting software
• Sage Accounting: popular with small businesses
• Hammock, Coconut: simpler options for freelancers
• Landlord-specific software: Arthur, Property Hawk, LettingSync (for rental income MTD)

HMRC's own free tool (HMRC Online Accounts) can be used for very simple cases, but functionality is limited.

Penalties for non-compliance

MTD ITSA non-compliance uses a points-based penalty system:

• Missing a quarterly submission = 1 penalty point
• Accumulate 4 points = £200 penalty
• Further failures: additional £200 per failure until all returns are brought up to date and points reset

Late payment penalties remain: 30 days = 1st penalty (1.5% × tax due), 6 months = 2nd penalty (3% × tax due), 12 months = 3rd penalty (3% × tax due).

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Allowable Expenses for Self-Employed 2026/27

Self-employed expenses must be incurred "wholly and exclusively" for business purposes. Key categories:

Capital allowances

If you purchase business equipment (not under cash basis), you claim capital allowances rather than the full cost upfront:

• Annual Investment Allowance (AIA): 100% of cost in year of purchase, up to £1 million per year
• Full Expensing: 100% first-year allowance for new main-rate plant and machinery (permanent from April 2023)
• Writing Down Allowance (WDA): 18% per year on pool balance for unqualified assets; 6% for integral features/long-life assets

Under cash basis (default for most sole traders), you simply deduct the cost of business equipment in the year it is purchased — no need for capital allowance calculations.

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Payments on Account 2026/27

Self-employed people often pay tax in advance via Payments on Account (POA):

• Two equal instalments: 31 January (during the tax year) and 31 July (after the tax year ends)
• Each instalment = 50% of the prior year's income tax + Class 4 NI
• Balancing payment (or refund): also due 31 January after the year end

Example: POA for 2026/27 tax year

Based on 2025/26 tax bill of £8,000:

• First POA: £4,000 due 31 January 2027
• Second POA: £4,000 due 31 July 2027
• 2026/27 balancing payment: due 31 January 2028

If your profits fall in 2026/27 vs 2025/26, you can apply to reduce POA via SA303 form (or online via Self Assessment). HMRC charges interest on underpaid POA, so reducing too aggressively risks interest charges — but if profits genuinely fell, the reduction is appropriate.

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The £1,000 Trading Allowance

If your gross self-employed income is £1,000 or less, you are exempt from tax on it and do not need to declare it. This covers:

• Casual selling (eBay, Vinted, Etsy)
• Occasional services (gardening, tutoring, pet-sitting)
• Small gig economy income

If your gross income exceeds £1,000, you can choose between:

• Deducting actual expenses from gross income (better if expenses > £1,000)
• Claiming the £1,000 Trading Allowance as a flat deduction instead (simpler, better if expenses < £1,000)

You cannot claim both the Trading Allowance AND actual expenses for the same trade.

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State Pension for Self-Employed in 2026/27

With Class 2 NI abolished, self-employed State Pension entitlement flows from:

• Class 4 NI contributions when profits exceed £12,570 (Lower Profits Limit)
• NI credits for those with profits between £6,725 (Small Profits Threshold) and £12,570

To qualify for any State Pension you need 10 qualifying NI years; for the full pension, 35 qualifying years. Self-employed people with variable income or career breaks should:

1. Check their NI record via the Government Gateway
2. Identify any gaps
3. Consider voluntary Class 3 NI contributions (£17.45/week) to fill gaps — break-even approximately 3 years after State Pension age

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Partnership Tax 2026/27

Partners in a general partnership are each self-employed for tax purposes:

• Each partner's share of partnership profit is declared on their individual Self Assessment
• Each pays income tax and Class 4 NI on their share
• The partnership itself files a Partnership Tax Return (SA800) showing profit allocation
• No corporate tax on the partnership itself

MTD ITSA applies to each partner based on their individual income — if a partner's share of partnership income plus any other income exceeds £50,000, they are subject to MTD ITSA from April 2026.

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Self-Employed vs Limited Company in 2026/27

A recurring question: at what point does incorporating save more than it costs?

At £50,000 profit, the limited company does not yet win — the accounting overhead offsets the tax saving. The crossover typically occurs at £70,000–£80,000 profit where the higher dividend rates and Corp Tax savings combine.

This completes the 6-part UK Tax Year 2026/27 series. Parts: Income Tax | NI | ISA & Pension | Property | CGT & Dividends | Self-Employment