Becoming self-employed in the UK is a popular option for individuals seeking flexibility, independence, and control over their work life. Whether you’re a sole trader, freelancer, or gig worker, understanding the opportunities and responsibilities that come with self-employment is essential.

What Is Self-Employment, Actually?

Self-employment in the UK refers to working for yourself rather than being employed by someone else. You run your own business as an individual and are personally responsible for its success or failure. Legally, this is known as operating as a sole trader, which is the most common form of self-employment.

As a self-employed person:

• You invoice clients for your work.
• You are not paid through PAYE (Pay As You Earn) and must handle your own tax and National Insurance.
• You are responsible for keeping business records, including income and expenses.
• You do not have employment rights such as holiday pay or sick pay.
• You are free to set your own hours, choose your clients, and work from anywhere.

Self-employment can include freelancers, contractors, and gig economy workers, provided they are not engaged under a contract of employment but instead work under a contract for services. This status must reflect reality—HMRC may challenge claims of self-employment if the working relationship closely resembles employment.

There is no requirement to incorporate a company in order to work as self-employed. Once you begin trading, you must register with HMRC as a sole trader and report your earnings annually via a Self Assessment tax return. You may choose a business name and can even employ staff, but legally, you and the business remain one and the same.

What Kind of Work Can You Do as Self-Employed?

Self-employment covers a wide range of industries and services. You can operate as a self-employed individual in nearly any field, including:

• Trades and manual work (e.g. builders, electricians, plumbers)
• Professional services (e.g. accountants, consultants, legal advisers)
• Creative work (e.g. writers, designers, photographers)
• Personal services (e.g. hairdressers, tutors, fitness coaches)
• Online and gig economy roles (e.g. delivery drivers, ecommerce sellers, digital marketers)

There are few restrictions, although some regulated professions may require specific licences, certifications, or registration with a professional body.

Should You Choose Self-Employment or a Limited Company?

There are pros and cons to being self-employed compared to operating through a limited company. Historically, the main advantages of self-employment have been simplicity and lower administrative burden, but from 6 April 2026, this may change due to the introduction of Making Tax Digital (MTD) for Income Tax.

Advantages of Self-Employment:

• Simplicity: Fewer legal and administrative requirements. No need to register with Companies House or maintain statutory records.
• Lower costs: No fees for preparing company accounts or submitting annual filings. Bookkeeping is generally simpler.
• Quick setup and closure: You can start or stop trading with minimal formalities—no need for incorporation or formal dissolution.
• Full control: You retain all profits after tax and do not need to manage payroll, issue dividends, or appoint directors.

Disadvantages of Self-Employment:

• Unlimited liability: You are personally liable for all business debts and legal claims, unlike a limited company where liability is limited to company assets.
• Lower professional perception: Some clients prefer dealing with limited companies due to their formal structure or for IR35 compliance.
• No financial separation: Business and personal finances are legally one, which can complicate loans, credit, or business transfers.

Additionally, from 6 April 2026, self-employed individuals with income above £50,000 will be subject to Making Tax Digital (MTD) reporting requirements, increasing the administrative burden and potentially the cost of compliance.

Registration and Reporting Obligations

If you start working for yourself, you must register as self-employed with HMRC by 5 October following the end of the tax year in which you began trading.

Once registered, you must complete a Self Assessment tax return each year. This includes reporting your income, expenses, and any tax owed. You are responsible for maintaining accurate records—such as invoices, receipts, and mileage—for at least five years after the filing deadline. Late submissions and payments may result in penalties and interest.

Making Tax Digital (MTD) for Income Tax

MTD is a government initiative to digitalise the tax system. It will affect self-employed individuals in stages:

• From April 2026, if your total business or property income exceeds £50,000, you must comply with MTD.
• From April 2027, the threshold will drop to £30,000.

Under MTD, you must:

• Keep digital records using MTD-compatible software
• Submit quarterly updates to HMRC
• Submit an end-of-period statement and a final declaration annually

MTD will eventually replace the traditional Self Assessment system for those who meet the income thresholds.

Taxes and National Insurance

As a self-employed person, your tax obligations include both Income Tax and National Insurance Contributions (NICs).

1. Income Tax

Tax is payable on your profits—calculated as income minus allowable expenses—at standard income tax rates. These profits are combined with your other income and taxed through your Self-Assessment. Tax rates for the 2025/26 tax year are as follows:

• 20% – basic rate
• 40% – higher rate (on income above £50,270)
• 45% – additional rate (on income above £125,140)

2. National Insurance Contributions (NICs)

There are two types of NICs relevant to the self-employed:

• Class 2 NI
  • Class 2 NI protects your pension and benefits entitlement.
  • If your profits are between £6,725 and £12,570, your contributions are treated as paid automatically (you pay nothing, but your record is protected).
  • If your profits are below £6,725, you can voluntarily pay £3.50 per week (2025/26 rate) to maintain your State Pension entitlement.
• Class 4 NI
  • Payable on profits over £12,570 at:
    • 6% on profits between £12,570 and £50,270
    • 2% on profits above £50,270

Conclusion

Working as self-employed in the UK offers freedom, flexibility, and potential, but it also comes with responsibilities. Whether you’re launching a new business or turning a side project into a main source of income, understanding your tax obligations, reporting duties, and the practical differences between sole trading and operating a limited company is essential to making an informed decision.

Thinking about working for yourself but not sure which route to take?

Click here to read our article on limited companies.