How your Self-Assessment tax bill is calculated

Understanding Your Income

Your Self-Assessment tax bill starts with all the income you've received during the tax year (6 April to 5 April). HMRC needs to know about various income streams to calculate your total earnings.

Common types of income reported through Self-Assessment include:

• Self-employment profits: This is your business income minus your allowable business expenses.
• Rental income: From any property you let out, after deducting allowable property expenses.
• Dividends: Income from shares in companies (outside of an ISA).
• Interest from savings: Unless it's already taxed at source or held in an ISA.
• Foreign income: Any income from overseas.
• Other income: Such as income from trusts or certain benefits.

Allowances and Deductions

Once your total income is established, various allowances and deductions reduce the amount of income that is actually subject to tax. These are crucial for lowering your overall tax bill.

Key allowances and deductions for the 2026/27 tax year include:

• Personal Allowance: Most individuals can earn up to £12,570 without paying Income Tax (figures for illustration — check current rates). This allowance starts to reduce if your income is over £100,000, decreasing by £1 for every £2 earned above this threshold, until it reaches zero.
• Trading Allowance: If your gross trading income is £1,000 or less, you may not need to declare it or pay tax on it.
• Property Allowance: Similar to the trading allowance, if your gross property income is £1,000 or less, it may be tax-free.
• Pension Contributions: Payments into a private pension scheme can extend your basic or higher rate tax bands, effectively reducing your taxable income.
• Gift Aid: Donations to charity under Gift Aid can also extend your tax bands.
• Allowable Expenses: For self-employment and property income, you deduct legitimate business or property expenses from your gross income to arrive at your taxable profit.
• Married Couple's Allowance: If you or your spouse/civil partner were born before 6 April 1935, you might be eligible for this allowance, which can reduce your tax bill by between £436 and £1,127 for 2026/27. You can also transfer up to £1,260 of your Personal Allowance to your spouse or civil partner if neither of you pays tax above the basic rate (Marriage Allowance).

Calculating Your Taxable Income

Your taxable income is the amount left after all applicable allowances and deductions have been subtracted from your total gross income. This is the figure that Income Tax and National Insurance Contributions (NICs) are then applied to.

For example, if your total income is £30,000 and you have a Personal Allowance of £12,570, your taxable income would be £17,430.

Income Tax and National Insurance Contributions

This is where the actual tax rates are applied. The UK operates a progressive tax system, meaning you pay different rates of tax on different portions of your income.

Income Tax (England, Wales, and Northern Ireland for 2026/27)

• Personal Allowance: Up to £12,570 – 0% (tax-free).
• Basic Rate: £12,571 to £50,270 – 20%.
• Higher Rate: £50,271 to £125,140 – 40%.
• Additional Rate: Over £125,140 – 45%.

Different rates and bands apply in Scotland.

Dividend Tax (2026/27)

You have a Dividend Allowance of £500. Dividends above this allowance are taxed at specific rates:

• Basic Rate Taxpayers: 10.75%.
• Higher Rate Taxpayers: 35.75%.
• Additional Rate Taxpayers: 39.35%.

Capital Gains Tax (CGT) (2026/27)

If you sell an asset that has increased in value, you might pay CGT. You have an Annual Exempt Amount of £3,000. Rates above this are:

• Basic Rate Taxpayers: 18%.
• Higher/Additional Rate Taxpayers: 24%.
• For residential property, the higher rate is 24%.

National Insurance Contributions (NICs) for the Self-Employed (2026/27)

• Class 2 NICs: These are now voluntary if your profits are below the Small Profits Threshold of £7,105. If your profits are £7,105 or more, Class 2 contributions are treated as paid to protect your National Insurance record, and you don't pay them directly. If your profits are below £7,105, you can choose to pay voluntary Class 2 NICs at £3.65 a week to protect your State Pension entitlement.
• Class 4 NICs: These are paid on your profits above certain thresholds.
• 0% on profits up to £12,570.
• 6% on profits between £12,570 and £50,270.
• 2% on profits over £50,270.

Payments on Account and Your Final Bill

Your Self-Assessment tax bill isn't always a single payment. If your tax bill for the previous year was over £1,000 and less than 80% was collected at source (e.g., through PAYE), HMRC usually requires you to make 'Payments on Account'.

• How they work: Each payment on account is typically half of your previous year's tax bill (including Class 4 NICs).
• Due dates: These are due by 31 January and 31 July.
• Balancing Payment: When you submit your tax return, HMRC calculates your actual tax liability for the year. If the payments on account you've made don't cover your full bill, you'll need to make a 'balancing payment' by the following 31 January. If you've paid too much, you'll receive a refund.

This system can sometimes lead to a higher-than-expected payment in January, as you're paying your balancing payment for the previous year plus your first payment on account for the current year.

Common mistakes

• Not claiming all allowable expenses: Many small business owners miss out on legitimate deductions, leading to a higher tax bill.
• Incorrectly calculating income: Failing to include all income streams or miscalculating profits.
• Not understanding Payments on Account: This often leads to confusion about why the January payment is significantly higher.
• Missing deadlines: Late filing or payment can result in penalties and interest.
• Ignoring tax code adjustments: If you have employment income, your tax code might be adjusted to collect some Self-Assessment tax, which can affect your overall bill.