Switching from employment to self-employment — or considering it — is one of the biggest financial decisions you can make. The tax treatment is fundamentally different, and understanding it can be worth thousands of pounds a year.
Self-employed workers pay Class 4 NI instead of Class 1. They can deduct business expenses before tax. They file Self Assessment. They get no employer pension contributions or statutory pay.
Both employed and self-employed people pay the same income tax rates in 2026/27: 20% basic rate, 40% higher rate, 45% additional rate. The Personal Allowance of £12,570 applies equally to both.
The key difference: employees pay tax on gross salary automatically via PAYE. Self-employed people pay tax on net profit (income minus allowable expenses) through Self Assessment, filed by 31 January each year.
This is where employed and self-employed workers diverge significantly:
| NI Type | Who pays | Rate 2026/27 |
|---|---|---|
| Class 1 Employee | Employed only | 8% on £12,570–£50,270; 2% above |
| Class 1 Employer | Employer only | 13.8% on salary above £5,000 |
| Class 4 | Self-employed only | 9% on £12,570–£50,270; 2% above |
| Class 2 | Abolished | Removed from April 2024 |
Self-employed workers can deduct allowable business expenses from income before tax. This is a significant advantage over employees who pay tax on their full salary. Common deductions include:
| Item | Employed | Self-employed |
|---|---|---|
| Gross income | £40,000 | £40,000 |
| Business expenses | £0 | varies |
| Income tax | £5,486 | £5,486 |
| National Insurance | £2,184 (Class 1) | £2,457 (Class 4) |
| Take-home pay | £32,330 | £32,057 |
Self-employed workers have no employer pension contributions (typically 3–5% of salary), no statutory sick pay, no statutory maternity/paternity pay, and no holiday pay. Factor these in when comparing total compensation.
Not necessarily more income tax — the rates and allowances are the same. Class 4 NI is slightly higher than Class 1 employee NI, but self-employed workers can reduce their taxable profit through business expenses, which employees cannot.
Class 4 NI at 9% on profits between £12,570 and £50,270, and 2% above that. Class 2 NI was abolished from April 2024.
Yes — any expense wholly and exclusively for the business can be deducted from profit before tax. See HMRC's full list of allowable expenses.