Comparison · 2026/27
Employed vs Self-Employed Tax 2026/27
At the same gross income, does an employee or a self-employed sole trader pay more tax in 2026/27? This comparison breaks down income tax, National Insurance, employer NI, take-home pay and hidden costs — and shows why the "self-employed pays less NI" advantage is often offset by missing employer pension contributions and statutory benefits.
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Tax Comparison at £40,000 Income (2026/27)
| Tax component | Employee (£40k salary) | Self-employed (£40k profit) |
|---|---|---|
| Income Tax | £5,486 | £5,486 |
| Employee/Class 4 NI | £2,197 (Class 1 @ 8%) | £2,462 (Class 4 @ 9%) |
| Employer NI (15% above £5k) | £5,250 (paid by employer) | £0 (you bear this) |
| Total tax burden (incl. employer NI) | £12,933 | £7,948 |
| Employee take-home pay | £32,317 | N/A |
| Self-employed profit after tax/NI | N/A | £32,052 |
| Employer pension contribution (est.) | +£1,200 (3% min auto-enrolment) | £0 |
| Effective total labour cost | £46,250 (£40k + employer NI + pension) | £40,000 gross |
Figures use 2026/27 rates: PA £12,570; Basic 20% to £50,270; NI employee 8% (£12,570–£50,270); Class 4 SE NI 9% (£12,570–£50,270); Employer NI 15% (above £5,000/yr secondary threshold).
Why the Self-Employed Take-Home Is Lower Than It Looks
At first glance, a self-employed person on £40,000 takes home £32,052 vs an employee's £32,317 — similar amounts. But the comparison is more complex:
- No employer pension contribution: the employee receives at least £1,200 (3% of qualifying earnings) from their employer into a workplace pension — effectively additional compensation not visible in take-home pay. The self-employed person must fund their entire pension themselves.
- No statutory sick pay: employees receive up to £116.75/week SSP for up to 28 weeks. The self-employed receive nothing unless they have income protection insurance.
- No redundancy protection: employees are entitled to statutory redundancy pay after 2 years of service. Self-employed individuals have no such protection.
- Business costs: the self-employed bear all their own equipment, software, insurance and workspace costs — though these are deductible from profits.
Why Self-Employment Has Advantages
- No employer NI: the employer saves £5,250 in employer NI at £40k — money the self-employed person keeps (or charges clients). At higher income levels, the employer NI saving becomes even more significant.
- Allowable expenses: self-employed individuals can deduct genuine business expenses from profits. An employee cannot deduct equivalent costs unless they are reimbursed by the employer.
- Trading Allowance: £1,000 of trading income is entirely tax-free, with no NI.
- Flexibility: self-employed individuals can time income, split income across tax years, and structure their business affairs to be tax-efficient.
Break-Even Analysis by Income Level
| Income level | Employee NI (Class 1) | Self-employed NI (Class 4) | SE NI advantage |
|---|---|---|---|
| £20,000 | £596 | £672 | -£76 (SE pays more) |
| £30,000 | £1,396 | £1,572 | -£176 (SE pays more) |
| £40,000 | £2,197 | £2,462 | -£265 (SE pays more) |
| £60,000 | £2,920 | £3,186 | -£266 (SE pays more) |
| £80,000 | £3,320 | £3,586 | -£266 (SE pays more) |
Note: The self-employed actually pay slightly more NI than employees at the same income because Class 4 (9%) is higher than employee Class 1 (8%) in 2026/27. The real saving for the self-employed is the absence of employer NI — which benefits the self-employed indirectly by keeping their cost to clients lower.
Self Assessment and MTD ITSA Requirements
Self-employed individuals must:
- Register for Self Assessment if gross income is above £1,000
- File an annual tax return (deadline 31 January)
- Make payments on account (50% of estimated annual tax bill in January and July)
- Keep records of income and expenses for at least 5 years
From April 2026, self-employed individuals with income above £50,000 must comply with Making Tax Digital ITSA — quarterly digital submissions and digital record-keeping. From April 2027, this extends to those with income above £30,000.
Employees have PAYE deducted automatically and rarely need to file Self Assessment unless they have other income sources or income above £100,000.
FAQs
Who pays less tax — employed or self-employed?
At the same gross income level (around £40,000 in 2026/27), a self-employed person takes home slightly more than an employee because they pay Class 4 NI (9% on £12,570–£50,270) rather than employee Class 1 NI (8%), and there is no employer NI on their income. However, a self-employed person receives no employer pension contributions, no sick pay, no maternity/paternity pay and bears all business costs personally. When these are factored in, employment can be more valuable at many income levels.
What National Insurance does a self-employed person pay?
In 2026/27, a self-employed person pays: Class 4 NI at 9% on profits between £12,570 and £50,270; 2% Class 4 NI on profits above £50,270; and optionally Class 2 NI (voluntary flat rate, currently incorporated into the SA process). There is no employer NI — this is a significant saving compared to employed workers, where the employer pays 15% of the salary above £5,000/year to HMRC.
Can a self-employed person deduct business expenses?
Yes — one of the major advantages of self-employment. Allowable business expenses reduce your taxable profit. Examples: professional subscriptions, equipment and tools, business travel (HMRC mileage rates apply to car use), home office costs (using the £6/week HMRC flat rate or actual cost method), marketing, professional services (accountant, lawyer) and training directly related to the business. Capital equipment can be claimed via Annual Investment Allowance (AIA) — up to £1,000,000/year at 100% first-year relief.
What statutory benefits does a self-employed person miss out on?
Self-employed individuals are not entitled to: statutory sick pay (SSP), statutory maternity/paternity pay (SMP/SPP/ShPP), employer pension contributions, employer-funded training or equipment, redundancy pay, or unfair dismissal protection. They can claim Maternity Allowance from the government (up to £184.03/week for 39 weeks in 2026/27 if they have paid Class 2 NI for 13 weeks in the qualifying period). Income protection insurance is strongly recommended for the self-employed to replace the statutory benefits they lack.
Does a self-employed person have to file Self Assessment?
Yes — if your self-employment income is above £1,000 (the Trading Allowance), you must register for Self Assessment and file an annual return. You must also make payments on account: 50% of your estimated annual tax bill is due on 31 January and 50% on 31 July. From April 2026, self-employed individuals with income above £50,000 must additionally comply with Making Tax Digital ITSA — digital record-keeping and quarterly submissions to HMRC.
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Disclaimer:Tax figures are illustrative for a single individual with no other income in 2026/27. Individual circumstances vary. Always use HMRC's own calculators or consult a qualified accountant for personal tax calculations.