You have finished your first year freelancing. The invoices went out, the money came in, and now you need to work out what you owe HMRC. The Self Assessment deadline is approaching and you are staring at a pile of bank statements wondering where to start.

This is the step-by-step process. No theory, no history of the tax system. Just the calculation, from revenue to final bill, with real numbers at every stage.

Step 1: Calculate your profit

Your tax bill is based on profit, not revenue. That distinction can save you thousands of pounds.

Profit is simple: everything you earned minus everything you spent to earn it.

Profit = Total Revenue - Allowable Expenses

Allowable expenses are costs that are wholly and exclusively for your business. HMRC is fairly reasonable about what counts. The common ones for freelancers:

Software and subscriptions: design tools, project management, cloud storage
Equipment: laptop, monitor, keyboard, desk (capital allowances apply for items over a certain value)
Home office costs: a proportion of rent, electricity, internet, or the simplified flat rate (currently £6/week without receipts, or £26/month)
Phone: business portion of your mobile contract
Travel: train tickets, fuel for client visits, parking (not your regular commute, since you don’t have one)
Professional development: courses, books, conferences directly related to your work
Accountancy fees: what you pay someone to help with all of this
Professional insurance: indemnity insurance, public liability
Marketing: website hosting, domain names, advertising
Coworking space: membership or day passes

Keep receipts for everything. You do not need to send them to HMRC with your return, but you do need to keep them for at least five years in case they ask.

Step 2: Calculate your Income Tax

Income Tax is progressive. You pay different rates on different portions of your profit. This confuses people because they think crossing into the 40% band means everything gets taxed at 40%. It does not.

The bands for 2025/2026:

Taxable profit	Rate
Up to £12,570	0% (Personal Allowance)
£12,571–£50,270	20% (Basic Rate)
£50,271–£125,140	40% (Higher Rate)
Over £125,140	45% (Additional Rate)

Worked example at £45,000 profit:

Your total revenue was £52,000 and you had £7,000 in allowable expenses. That leaves £45,000 taxable profit.

First £12,570 at 0% = £0
Next £32,430 (from £12,571 to £45,000) at 20% = £6,486

Total Income Tax: £6,486

Notice you are nowhere near the 40% band. That only kicks in above £50,270. Your effective Income Tax rate on £45,000 profit is about 14.4%.

Step 3: Calculate your National Insurance

As a sole trader, you pay two types of National Insurance:

Class 2: £3.45 per week

That is roughly £180 per year. It is a flat charge if your profits are above £12,570. This qualifies you for the State Pension and contributory benefits like Maternity Allowance.

Class 4: percentage-based

6% on profits between £12,570 and £50,270
2% on profits above £50,270

Continuing the £45,000 example:

Class 2: £180
Class 4: £32,430 (profit between £12,570 and £45,000) at 6% = £1,946

Total National Insurance: £2,126

Combined with Income Tax, your total tax bill on £45,000 profit is £8,612. That is an effective rate of about 19.1%.

Step 4: VAT (if applicable)

VAT is not a tax on your profit. It is a tax on your sales that you collect from customers and hand to HMRC. But it matters because it affects your pricing and cash flow.

When you must register: if your taxable turnover exceeds £90,000 in any rolling 12-month period, you are legally required to register for VAT. You can also register voluntarily below that threshold if it benefits you (for example, if most of your clients are VAT-registered businesses and you want to reclaim VAT on your expenses).

What registration means: you charge 20% VAT on top of your invoices. If you bill £1,000, you now bill £1,200. You collect that £200 and pay it to HMRC quarterly, minus any VAT you paid on your business expenses.

The Flat Rate Scheme: if your VAT-inclusive turnover is under £150,000, you can opt for the Flat Rate Scheme. Instead of tracking VAT on every expense, you pay HMRC a fixed percentage of your gross turnover (the percentage depends on your industry, typically 10–15%). In your first year of VAT registration, you get a 1% discount. This simplifies your bookkeeping considerably, though it may not save you money depending on how much VAT you reclaim on expenses.

If you are under £90,000 turnover: you probably do not need to worry about VAT right now. Just be aware of the threshold and monitor your revenue as you grow.

Step 5: Payments on Account (the first-year trap)

This is where most new freelancers get caught. You do your first Self Assessment, work out you owe £8,612, and prepare to pay it. Then HMRC tells you that you also owe Payments on Account for next year.

Here is how it works: if your tax bill is over £1,000, HMRC assumes you will earn roughly the same next year and asks you to pay towards it in advance. They split it into two instalments:

31 January: 50% of the previous year’s bill
31 July: another 50%

In your first year, that January deadline hits you with a double payment: your full tax bill for the year just ended, plus 50% of next year’s estimated bill.

Using the £45,000 example:

Tax bill for Year 1: £8,612
First Payment on Account for Year 2 (50%): £4,306
Total due 31 January: £12,918
Second Payment on Account (31 July): £4,306

That first January, you are paying 150% of one year’s tax. If you were only saving for 100%, you are £4,306 short. This catches people out every single time.

The good news: Payments on Account stabilise after the first year. From Year 2 onwards, you are paying the balance plus adjustments, not the full bill again. But that first January is brutal if you are not prepared.

Worked examples at three income levels

Here is what the full calculation looks like at three different profit levels, assuming no VAT registration:

	£25,000 profit	£45,000 profit	£70,000 profit
Income Tax
Personal Allowance (0%)	£0	£0	£0
Basic Rate (20%)	£2,486	£6,486	£7,540
Higher Rate (40%)	£0	£0	£7,892
Total Income Tax	£2,486	£6,486	£15,432
National Insurance
Class 2	£180	£180	£180
Class 4 (6%)	£746	£1,946	£2,262
Class 4 (2%)	£0	£0	£395
Total NI	£926	£2,126	£2,837
Total tax bill	£3,412	£8,612	£18,269
Effective rate	13.6%	19.1%	26.1%
You keep	£21,588	£36,388	£51,731

The jump from £45,000 to £70,000 is sharp. That is the 40% band doing its work on the £19,730 above £50,270. Your effective rate nearly doubles compared to the £25,000 level. This is exactly why tracking expenses matters. Every deductible expense you can legitimately claim keeps more of your profit in the lower bands.

The simpler way

Every number in this article (the bands, the NI classes, the progressive rates) is something Nett calculates automatically in the background. Each time you log income or an expense, your tax reserve updates and your Safe to Spend adjusts.

You invoice £3,000 and Nett tells you how much of that is actually yours. No spreadsheet. No manual band calculations. No forgetting about Class 4 NI.

It will not replace your accountant or file your Self Assessment. But it will make sure you always know where you stand, every day of the year, not just in January.

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Related reading:

How much tax to set aside as a freelancer in the UK, practical rules of thumb for monthly saving
Best expense tracker apps for freelancers in the UK, honest comparison of the main options