Comparison · 2025/26
PAYE vs Self-Employed
Self-employed pay slightly less tax than PAYE employees at the same gross income, but the gap narrows once you factor in lost employer pension contributions, paid holiday, sick pay and the cost of running a business.
TL;DR — 30 Second Answer
- • Self-employed: lower NI (6% / 2%), expense deductions, control
- • PAYE: holiday/sick pay, employer pension match, no admin
- • At £40k gross: self-employed nets ~£548 more in tax — but loses ~£3,000+ in benefits
- • Pick PAYE if stable income, value benefits, hate admin
- • Pick self-employed if day rate £200+, multiple clients, want flexibility
£40,000 Gross — Tax Compared (2025/26)
| Item | PAYE Employee | Self-Employed |
|---|---|---|
| Gross income | £40,000 | £40,000 |
| Income Tax (20% on £27,430) | £5,486 | £5,486 |
| National Insurance | £2,194 (Class 1, 8%) | £1,646 (Class 4, 6%) |
| Class 2 NI | — | £0 (voluntary) |
| Net take-home | £32,320 | £32,868 |
| Employer pension (5%) | +£2,000 | £0 (self-fund) |
| Paid holiday (28 days) | ~£4,300 value | £0 (unpaid) |
| SSP (28 weeks if sick) | ~£3,300 max | £0 (no SSP) |
Self-employed Class 4 NI: 6% £12,570-£50,270, 2% above. Class 2 (£3.45/week) abolished as mandatory April 2024.
PAYE — Pros & Cons
✓ Pros
- • Auto tax via PAYE — no Self Assessment
- • Statutory rights: SSP, SMP, holiday, redundancy
- • Pension auto-enrolment + 3% employer match
- • Easier mortgage application (3 payslips)
- • Stable monthly income
✗ Cons
- • Higher NI (8% / 2%)
- • No expense deductions (limited «work clothes»/«uniform» relief only)
- • Salary cap — fixed pay scale
- • Boss controls hours/work
- • Notice period restrictions
Self-Employed — Pros & Cons
✓ Pros
- • Lower NI (Class 4: 6% / 2%)
- • Expense deductions: home office, mileage, equipment
- • Choose own hours, clients, projects
- • Trading allowance: first £1,000 tax-free
- • Income uncapped — earn what you bill
✗ Cons
- • No paid holiday, sick pay, or maternity
- • No employer pension — fund SIPP yourself
- • Self Assessment + records + payments on account
- • Income lumpy — manage cash flow
- • Mortgage applications harder (2-3 yr accounts)
Watch-out: IR35 (Off-Payroll Working)
HMRC may reclassify you as a «disguised employee» if you work like staff for one client. Inside IR35: full PAYE tax on your fees, no NI/expense advantages. Outside IR35: full self-employed tax treatment. Medium/large clients determine status via SDS; small clients leave it to you. Use HMRC CEST tool as starting point but get professional review for borderline contracts.
When to Switch
- PAYE → Self-employed: When day rate £250+, you have 2+ clients lined up, 6+ months\' emergency fund.
- Self-employed → PAYE: When you want stability, kids/mortgage need predictable income, IR35 risk too high.
- Both at once: Common — PAYE job + freelance income. Personal Allowance applies once across all sources.
Related Calculators
Calculators for this topic
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.
VAT Calculator
Add or remove VAT from any amount. Supports 20%, 5% and 0% UK VAT rates.
Corporation Tax Calculator
Calculate Corporation Tax for UK limited companies for 2025/26.
Disclaimer: Self-employment is a major decision — check IR35, mortgage implications, insurance needs (income protection, public liability). Most banks need 2-3 years of SA302 forms before offering competitive self-employed mortgages.