Self-Employed vs Employed Tax Comparison
Compare take-home pay as a sole trader (self-employed) vs employed on the same income. Calculate income tax, Class 2 and 4 NIC, and whether contracting via limited company would be better.
Frequently Asked Questions
Is self-employment always more tax-efficient than employment?
On the same income, self-employment is usually more NIC-efficient: Class 4 NIC (6%/2%) is lower than the combined Class 1 employee NIC (8%/2%) plus employer NIC (13.8%). However, employees receive benefits like statutory sick pay, maternity pay, auto-enrollment pensions, and employment rights that self-employed workers don't get.
What NICs does a self-employed person pay?
Self-employed workers pay Class 2 NIC (£3.45/week if profits exceed £12,570 in 2025/26) for State Pension entitlement, plus Class 4 NIC on profits: 6% on profits between £12,570 and £50,270, and 2% above £50,270. These are lower than the combined employee/employer Class 1 NICs.
What business expenses can self-employed people deduct?
Allowable expenses include: office costs (stationery, software, home working portion), travel (vehicles, public transport, subsistence), marketing and advertising, professional fees (accountant, legal), training and development, bank charges and interest, and cost of goods sold. Personal expenses cannot be claimed.
Can I be both employed and self-employed?
Yes — you can have PAYE employment and self-employment simultaneously. Tax and NIC on employment income is deducted by your employer. Self-employment profits are declared on Self Assessment. NIC thresholds apply across both, but there are annual maximum NIC limits to prevent overpayment.
What about contracting through a limited company?
A limited company (personal service company / PSC) can be more tax-efficient at higher income levels: take a small salary (minimising employee/employer NIC), top up with dividends (taxed at 8.75%/33.75%/39.35% — lower than income tax rates), and leave profits in the company at 19–25% CT rate. However, IR35 rules can force employment taxation if you're caught.
Do self-employed people get any NIC credits?
Self-employed people with profits above the Lower Profits Limit (£12,570 in 2025/26) get a National Insurance credit that counts for State Pension purposes — even if they have no Class 2 NIC to pay (Class 2 was effectively abolished for those above the limit, but credits are still awarded automatically).
How does the self-employment income tax payment work?
Self-employed people pay tax through Self Assessment: first payment on account by 31 January (50% of prior year's tax), second payment on account by 31 July (another 50%), and balancing payment by the following 31 January. This can create cash flow challenges — you may need to pay two years' worth of tax in your first year of trading.
Does self-employment affect Universal Credit?
Yes — self-employed Universal Credit claimants are subject to the Minimum Income Floor (MIF) after the first 12 months of self-employment. The MIF treats you as earning the National Living Wage × your expected working hours, even if you earn less. This can significantly reduce UC payments for low-earning self-employed people.