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What Tax Does a Self-Employed Tradesperson Pay?

If you work as a self-employed plumber, electrician, carpenter, builder, or any other trade, understanding your tax obligations is essential. This article explains every tax a self-employed tradesperson faces in the UK, what you can claim against your tax bill, and how to stay on the right side of HMRC. It covers income tax, National Insurance, VAT, and the Construction Industry Scheme — all with 2025/26 figures.

Income Tax for Sole Trader Tradespeople

As a self-employed tradesperson, you pay income tax on your profits — that is, your income after deducting allowable business expenses. Your profits are taxed using the same income tax bands as employees, but you report them through self assessment rather than PAYE.

In 2025/26, the tax bands are:

  • Personal Allowance: £0 to £12,570 — 0% tax
  • Basic Rate: £12,571 to £50,270 — 20%
  • Higher Rate: £50,271 to £125,140 — 40%
  • Additional Rate: Over £125,140 — 45%

So if your net profit for the year is £40,000, you will pay 20% on £27,430 (the amount above the £12,570 personal allowance). That works out at £5,486 in income tax — before National Insurance.

Once your profits exceed £100,000, you start to lose your personal allowance at a rate of £1 for every £2 of income above that threshold. At £125,140, the allowance is gone entirely, creating an effective 60% marginal rate on income between £100,000 and £125,140.

National Insurance Contributions

Self-employed people pay two classes of National Insurance. The rules changed from April 2024, and the 2025/26 position is as follows.

Class 4 National Insurance

Class 4 NICs are the main charge. In 2025/26, you pay 6% on profits between £12,570 and £50,270, and 2% on profits above £50,270. Check the latest HMRC guidance to confirm the exact Class 4 rate for your position, as rates have changed in recent years.

Class 2 National Insurance

Class 2 NICs were effectively abolished for most self-employed people from April 2024. If your profits are above the Small Profits Threshold (check the latest HMRC guidance for the current figure), you will still build State Pension entitlement through your Class 4 contributions. If your profits fall below that threshold, you may need to pay voluntary Class 2 or Class 3 contributions to protect your State Pension record.

National Insurance adds a meaningful cost on top of income tax, which is why many tradespeople earning consistently above the higher rate threshold consider whether incorporating as a limited company makes financial sense.

Allowable Business Expenses

You only pay tax on your profits, not your total income. Claiming every allowable expense you are entitled to is one of the most straightforward ways to reduce your tax bill legally.

Common allowable expenses for tradespeople include:

  • Materials and stock used in jobs
  • Tools and equipment (either as an expense or through capital allowances)
  • Van or vehicle costs — fuel, insurance, servicing, and hire (or the HMRC mileage rate if you use a personal vehicle)
  • Workwear, protective clothing, and safety equipment
  • Public liability insurance and professional indemnity insurance
  • Subcontractor costs (where you use subbies on jobs)
  • Advertising and website costs
  • Business phone and broadband
  • Accountancy fees
  • Relevant training and certification costs

You cannot claim everyday clothing, entertaining clients, or any costs that are not wholly and exclusively for business use. If you work from home, you may be able to claim a proportion of household costs — either using HMRC’s flat rate or by calculating actual costs. Keep receipts and records for everything.

Capital Allowances and the Annual Investment Allowance

When you buy tools, equipment, or plant, you can often deduct the full cost in the year of purchase using the Annual Investment Allowance (AIA). The AIA limit is currently very generous — check the latest HMRC guidance for the precise current figure, as it has been adjusted several times. For most self-employed tradespeople, the AIA means you get full tax relief on equipment purchases immediately rather than spreading the deduction over several years.

VAT and the Registration Threshold

In 2025/26, you must register for VAT once your taxable turnover exceeds £90,000 in a rolling 12-month period. Once registered, you charge VAT on your invoices (most construction and trade work is standard-rated at 20%), collect it from customers, and pay it to HMRC after deducting the VAT you have paid on business purchases.

Many tradespeople are surprised how quickly they hit the threshold. If your day rate is £350 and you work 260 days a year, your turnover is £91,000 — just over the limit.

You can also choose to register voluntarily before you hit the threshold. This makes sense if most of your customers are VAT-registered businesses, because they can reclaim the VAT you charge and you can reclaim VAT on your own purchases.

The Flat Rate Scheme is worth considering for tradespeople. It can simplify your accounting and sometimes produce a small cash benefit, though the advantages depend on your sector and cost structure. Our team handles VAT returns for tradespeople and can advise whether the Flat Rate Scheme works in your favour.

The Construction Industry Scheme (CIS)

If you work in construction — building, decorating, roofing, plumbing, electrical, groundwork, and many related trades — the Construction Industry Scheme almost certainly applies to you.

Under CIS, contractors are required to deduct tax from payments made to subcontractors and pay it directly to HMRC. As a subcontractor, this means you may receive less than your invoice amount, with the deduction held against your tax and National Insurance liability.

The standard CIS deduction rate is 20% for registered subcontractors. Unregistered subcontractors face a 30% deduction rate, so it pays to be registered. If HMRC grants you gross payment status, the contractor pays you in full and you handle all your own tax — but you need a clean compliance record to qualify.

The CIS deductions you have had taken are offset against your final tax bill when you complete your self assessment return. If more has been deducted than you owe, HMRC will refund the difference. Getting your CIS returns right is important — both for your own cash flow and your obligations if you employ subcontractors yourself.

If you regularly use subbies, you are a contractor under CIS and must verify them with HMRC, deduct the correct amount, and file monthly CIS returns. Penalties apply for late or incorrect returns.

Self Assessment and Payment Deadlines

Every self-employed tradesperson must complete a self assessment tax return each year. The key dates are:

  • 5 April: End of the tax year
  • 5 October: Deadline to register for self assessment if you are newly self-employed
  • 31 January: Online tax return filing deadline and payment of tax owed
  • 31 July: Second payment on account (if applicable)

Payments on account catch many tradespeople out. Once your tax bill exceeds a certain amount, HMRC requires you to make advance payments towards the following year’s bill — two instalments, each worth half of last year’s liability. This means your first year of self assessment can result in a surprisingly large payment: the current year’s tax plus the first advance instalment for next year, all due on 31 January.

Late filing attracts an automatic £100 penalty, with further charges for extended delays. Late payment attracts interest. Keep track of your deadlines and set money aside throughout the year to avoid a cash flow shock.

Making Tax Digital for the Self-Employed

From April 2026, self-employed tradespeople and landlords with income over £50,000 will need to comply with Making Tax Digital for Income Tax Self Assessment (MTD for ITSA). This replaces the annual self assessment return with quarterly digital submissions and a final declaration, all made through MTD-compatible software.

If your income is between £30,000 and £50,000, the current plan brings you into MTD from April 2027. Check the latest HMRC guidance as the threshold and timeline may be updated.

The practical implication is that you will need to keep digital records from day one of your accounting period, not scramble to piece everything together in January. Using software like Xero now puts you ahead of the change. If you need help getting set up, our Xero training service gets tradespeople up to speed quickly.

Should You Trade as a Limited Company Instead?

At some level of profit, operating through a limited company becomes more tax-efficient than sole trading. The comparison is not straightforward, but here is the basic picture.

A limited company pays corporation tax on its profits — 19% on profits up to £50,000, rising to 25% on profits over £250,000 (with marginal relief in between) in 2025/26. As a director, you take a low salary and draw the rest as dividends. In 2025/26, the dividend allowance is £500. Dividends above that are taxed at 8.75% (basic rate), 33.75% (higher rate), or 39.35% (additional rate).

This structure can reduce the combined tax and National Insurance burden significantly at higher profit levels. However, a limited company brings extra compliance: annual accounts, corporation tax returns, payroll, and Companies House filing. There is also less flexibility in how you access money. The right answer depends on your profit level, personal circumstances, and plans for the business.

Many tradespeople in the construction sector work through limited companies and still fall within CIS as subcontractors or contractors. The scheme applies regardless of your legal structure.

Keeping Your Records Straight

Good record-keeping is not just an admin chore — it directly affects your tax bill. Missing expense records mean you pay tax on money you should never have been taxed on. HMRC can enquire into your returns going back several years, and without receipts and records you cannot defend your figures.

At a minimum, keep:

  • All sales invoices and records of income received
  • All purchase receipts and supplier invoices
  • Bank statements (business account preferred)
  • Mileage logs if you are claiming business miles
  • CIS deduction statements from contractors

A separate business bank account makes this far easier. Mixing personal and business spending creates unnecessary work and increases the risk of errors. Professional bookkeeping ensures your records are complete, your expenses are correctly categorised, and your tax return reflects the true position of your business.

Staying on top of your numbers throughout the year also means you can use cash flow planning to set aside the right amount for your tax bill, rather than facing a shortfall in January.

The Bottom Line

Self-employed tradespeople face income tax, National Insurance, and potentially VAT and CIS obligations — all running simultaneously. The rates and thresholds for 2025/26 mean that a tradesperson earning £45,000 profit could easily pay £8,000 to £10,000 in tax and NIC combined. Getting your expenses right, registering for VAT at the right time, managing CIS correctly, and filing on time are all non-negotiable parts of running a trade business. If any of this feels complex, speaking to an accountant who understands the trades is the most straightforward way to make sure you are not paying more than you should.