2025/26 income tax rates at a glance
| Band | Taxable income | Rate |
|---|---|---|
| Personal allowance | Up to £12,570 | 0% |
| Basic rate | £12,571 — £50,270 | 20% |
| Higher rate | £50,271 — £125,140 | 40% |
| Additional rate | Above £125,140 | 45% |
National Insurance for sole traders (2025/26)
| Class | Applies when | Rate |
|---|---|---|
| Class 2 | Profits > £12,570 | £3.45/week |
| Class 4 | £12,570 — £50,270 | 6% |
| Class 4 upper | Above £50,270 | 2% |
Dividend tax rates (2025/26)
| Band | Rate | Allowance |
|---|---|---|
| Dividend allowance | 0% | First £500 |
| Basic rate taxpayer | 8.75% | Within basic band |
| Higher rate taxpayer | 33.75% | Above £50,270 |
| Additional rate | 39.35% | Above £125,140 |
Sole trader or limited company?
The right structure depends on your profit level, risk appetite, and growth plans. For profits below £25,000–30,000, sole trader status is usually simpler and often equally efficient. Above £40,000–50,000, the combination of a lower corporation tax rate and dividend extraction typically makes a limited company more tax-efficient.
The optimal director salary strategy
For most single-director companies with no other employees, the optimal salary is £12,570 (the personal allowance). At this level, no income tax is payable and no employee/employer NI is triggered (provided no Employment Allowance applies). Remaining profits are declared as dividends, which are taxed at lower rates than salary and are not subject to NI.
Marginal rate trap at £100,000
The personal allowance tapers down by £1 for every £2 of income above £100,000. This creates an effective 60% marginal tax rate on income between £100,000 and £125,140. Pension contributions are the most effective way to reduce income back below this threshold.
Self Assessment payment schedule
Sole traders pay tax through Self Assessment: a balancing payment on 31 January following the tax year, plus payments on account on 31 January and 31 July (each equal to 50% of last year’s tax bill). The monthly set-aside figure in this calculator smooths these payments across 12 months to protect your cashflow.