Moving from PAYE to invoicing clients changes not only your tax wrappers, but how cash hits your account through the year. This tool keeps the arithmetic explicit so you can negotiate day rates with your eyes open.
What self-employment tax does in the UK
Sole traders pay income tax on profits after the personal allowance and Class 4 National Insurance on bands aligned with income tax thresholds (6% between £12,570 and £50,270, 2% above in the 2025/26 teaching stack used here). Class 2 is a small weekly flat when profits exceed the small profits threshold—budget it as cash even when it looks minor.
Class 2 and Class 4 National Insurance explained
Class 4 rides on your profit figure alongside income tax; Class 2 is separate and visible on your SA statement. Employees split Class 1 with employers—your self-employed headline must replace the employer’s 13.8% NI on PAYE when you compare offers fairly.
Why PAYE and sole trader gross numbers mislead
£65,000 PAYE is not £65,000 Schedule D turnover. Employers pay secondary NI and often subsidies—your day rate must recover that hidden stack plus bench, holidays, and admin time.
Student loans and marginal pressure
Plan 1 / Plan 2 student loans add 9% above thresholds in simplified models—the effective marginal rate can exceed 50% once income tax, NI, and loan coincide.
Pension gap for sole traders
Without employer auto-enrolment, you fund retirement from profit. If you skip it in negotiations, headline net looks higher than sustainable wealth.
Three GBP examples
Teaching illustrations only:
- £40k profit vs £40k salary: employer NI and employee NI differences often leave sole trader cash behind on identical face numbers unless expenses are real. - £65k: basic and higher-rate edges interact; Class 4 at 6% is material across the £12,570–£50,270 band. - £100k: additional rate and 2% Class 4 tail; IR35 risk may push contractors back toward deemed employment—outside IR35 modelling still needs employer-cost parity.
How PAYE quoting differs from your invoice total
Employers operate PAYE at source. You see tax and primary National Insurance withheld before money reaches you. Above the upper earnings limit, NI rates step down—mirroring, imperfectly, how Class 4 works for self-employed profits.
On the freelance path, you must reserve cash for payments on account and student loan, where applicable. Our model approximates your operating profit after common business expenses—layer your own accountant's adjustments for capital allowances and basis periods.
Student loan thresholds by plan
Plan thresholds interact with your earned or trading income. At common tech salaries, an extra £1 of profit can trigger nine pence of student loan alongside income tax and NI—an effective marginal rate that surprises people who only looked at headline income tax bands.
Pension auto-enrolment
We assume a typical employee contribution for illustration and show employer pension as part of total reward. You can adjust figures to mirror your scheme. Drawdown, annual allowance, and tapered protections are outside the scope of this simple sheet.
Important
Indicative only — not tax or legal advice.
Who benefits most from self-employment in the UK?
When sole trader tends to win
Self-employment works when:
- Your **day rate** clears market floors for your skill once **employer NI** is added back.
- You claim **legitimate expenses** (travel, software, professional subscriptions).
- You maintain **utilisation** and low **bad debt**.
When PAYE is smarter
Prefer employment when:
- **Benefits** (employer pension, insurance, stock) are large versus your freelance premium.
- You are **IR35-caught** or need **paid leave** stability.
- Student loan and marginal rates wipe out small rate uplifts.
FAQ
You pay income tax on taxable profit after allowances and Class 4 NI on most trading profits, plus Class 2 where applicable; effective % rises with bands and student loans.
This page pairs our PAYE vs sole trader engine with UK bands so you can see net cash side by side under simplified 2025/26 assumptions.
Not automatically, but without employer NI sharing you often need higher gross turnover to match PAYE net; Class 4 replaces part of that story for profits.
Start from revenue minus allowable expenses, apply income tax bands, add Class 4 and Class 2 NI, then subtract student loan in the tool if relevant.