How much can you earn before paying tax? Small business tax guide

Published Friday 3 July 2026

Table of contents

• How much can you earn before paying tax?
• What counts as taxable income?
• When do you pay National Insurance?
• When to register for Self Assessment
• Get tax ready with Xero
• FAQs on earning before paying tax

Key takeaways

• Individuals in the UK have two main tax thresholds: the tax-free personal allowance of £12,570 and the tax-free trading allowance of £1,000.
• If your income exceeds the £12,570 personal allowance, you start paying Income Tax. Employees have deductions handled by their employer, while self-employed people need to register for Self Assessment when they go above the £1,000 trading allowance.
• You also need to pay National Insurance when you reach certain income thresholds, and the type you pay depends on your employment status and earnings.

How much can you earn before paying tax?

In the UK, you can earn up to £12,570 per year before paying Income Tax. This is your tax-free personal allowance for the 2025/26 tax year.

If you're self-employed or a combination of employed and self-employed, it's worth knowing when you need to start paying tax. A small side hustle that starts growing, or a freelance business that suddenly takes off, can result in increased tax obligations. This is especially true if you're combining self-employment and employment.

There are two main earning thresholds you need to be aware of when it comes to tax:

• £12,570 tax-free personal allowance
• £1,000 tax-free trading allowance

The personal allowance is the amount of income you can earn before paying Income Tax. This is the total amount you receive from employment, self-employment, or a combination of the two.

If you earn £12,000 per year from a PAYE job, you won't need to pay Income Tax on your earnings. The same applies if you earn £6,000 from a PAYE job and £6,000 from your own small business. However, if you earn £6,000 from a PAYE job and £8,000 from your own small business, this takes you above the £12,570 personal allowance. You'll then be subject to the basic rate of Income Tax. Your personal allowance decreases when you earn above £100,000.Here are the Income Tax rates and bands for the 2025/26 tax year in England, Wales and Northern Ireland:

• Personal allowance (up to £12,570): 0%
• Basic rate (£12,571 to £50,270): 20%
• Higher rate (£50,271 to £125,140): 40%
• Additional rate (over £125,140): 45%

The £1,000 tax-free allowance is for trading and property income. You can earn £1,000 or less on a side hustle, hobby, or rental income without needing to declare the earnings to HM Revenue and Customs (HMRC) with a Self Assessment Tax Return. If you have property and trading income, you get a £1,000 allowance for each.

The trading allowance is separate from the personal allowance of £12,570, and you're entitled to both. In practice, this means you could earn up to £12,570 from a job and up to £1,000 from your side hustle too, and not pay Income Tax.

Other allowances include:

• Blind Person's Allowance, which is £3,130 for the tax year 2025/26, on top of the £12,570 personal allowance
• Marriage Allowance, which lets you transfer £1,260 of your personal allowance to your partner

Tax-free trading allowance UK example

If you earn more than £1,000 through trade or property, you can choose to deduct the trading allowance instead of your expenses to reduce your tax bill. Here's an example:

Priya makes £1,400 from her illustration side hustle. Since her income is above £1,000, she needs to file a Self Assessment Tax Return. Her expenses are £300, and if she deducts these from her earnings, the total taxable profit is £1,100. Instead of deducting her expenses, she claims the trading allowance of £1,000 on her Self Assessment, bringing her profits down to £400. This means she's taxed on the £400, instead of the £1,100.

You can't use both the trading allowance and expense deductions at the same time. The most tax-efficient option depends on whether your total expenses are more than the £1,000 allowance.

Regardless of whether you're likely to go over the £1,000 threshold with trading or property earnings, you should keep records of income and expenditure. This helps you track whether you're likely to go above £1,000 in earnings, and gives you the records for calculating self-employed tax.

What counts as taxable income?

Taxable income is any money you earn that's subject to Income Tax. This includes earnings from employment, self-employment, and various other sources. How much you're taxed depends on your total income for the year, as covered in the previous section.

Alongside employment and self-employment income, you pay tax on:

• certain state benefits
• most pensions, including state and company pensions
• rental income
• benefits received from your job
• income from trusts
• savings interest above your savings allowance
• dividend income above your dividend allowance

The savings allowance lets basic-rate taxpayers earn up to £1,000 in interest tax-free, while higher-rate taxpayers get £500. The dividend allowance is £500 for the 2025/26 tax year. Any income above these thresholds is added to your taxable earnings.

Capital gains are taxed separately from income. If you sell an asset, such as property or shares, for a profit above the annual exempt amount, you may need to pay Capital Gains Tax. This is separate from Income Tax and has its own rates and thresholds.

Check HMRC's list of taxable income to see what does and doesn't count.

When do you pay National Insurance?

National Insurance is a contribution you make towards the state pension and other benefits. You pay National Insurance if you're over the age of 16 and earn more than £242 per week from one job, or are self-employed with profits above £12,570 per year. There are different National Insurance classes, and the one that applies to you depends on your employment status and how much you earn.

Employees pay Class 1 National Insurance, and these contributions are deducted and forwarded to HMRC by the employer. If employees earn below £242 but above £125 per week, they can choose to voluntarily pay Class 3 National Insurance to cover gaps in their record.

The current rate for Class 1 National Insurance is 8% on earnings between £1,048 and £4,189 per month, and 2% on earnings above this. For Class 3 National Insurance, it's £17.75 per week.

Self-employed people pay Class 4 National Insurance on profits above £12,570. Those with profits below £6,845 have no mandatory National Insurance to pay, but they can choose to make Class 2 contributions to cover gaps in their record. Class 4 National Insurance is 6% on profits between £12,570 and £50,270, and 2% on profits above this. Voluntary Class 2 contributions are £3.50 per week.

You may need to pay both employed and self-employed National Insurance, depending on how much you earn. You can find a full list of current National Insurance rates for employed and self-employed people on the GOV.UK website.

When to register for Self Assessment

You need to let HMRC know if you go above the tax-free trading allowance of £1,000, by registering for Self Assessment. This tells HMRC that you need to file a Self Assessment Tax Return, and you'll get a notification when your tax return is due.

The deadline for registering for Self Assessment is 5 October, following the end of the tax year. If you earn £2,000 from your side hustle in the tax year 2025/26, you need to register for Self Assessment by 5 October 2026.

You don't need to tell HMRC if you also have employment income above £12,570. Your employer takes care of Income Tax and National Insurance deductions for you.

From April 2026, Making Tax Digital (MTD) for Income Tax Self Assessment starts for self-employed individuals and landlords with qualifying income over £50,000. If you fall into this group, you'll need to keep digital records and send quarterly updates to HMRC using compatible software. The threshold drops to £30,000 from April 2027. You can check the latest details on the GOV.UK MTD page.

Get tax ready with Xero

If you're growing a small business or building up your side hustle, the last thing you want is to be bogged down by financial admin.

Accounting software like Xero is simple to use and saves you time on admin tasks, so you have more energy to spend on growing your venture. Connect your bank account so that business transactions flow in automatically, and use the reconciliation predictions feature to speed up bookkeeping. You can even send digital invoices and reminders from the software.

And when it comes to tax time, Xero's features support Self Assessment and Making Tax Digital returns. Whatever stage your business is at, you have the tools you need to comply with UK tax law.

Get one month free

FAQs on earning before paying tax

Here are some common questions about tax thresholds and what you can earn before paying tax in the UK.

How much can I earn per month without paying tax?

You can earn up to £1,048 per month before paying Income Tax. This is the monthly equivalent of the £12,570 annual personal allowance. For sole traders, there's no monthly threshold, but the annual amount is the same: £12,570. If you earn more than £1,000 from trade or property, you need to register for Self Assessment.

Do I pay tax on a second job?

Yes, if your total taxable income is above the £12,570 personal allowance. The Income Tax threshold is based on your annual earnings across all jobs, not the number of jobs you have.

Do I pay National Insurance if I don't pay Income Tax?

In most cases, you'll pay National Insurance and Income Tax at the same point, because the threshold for National Insurance (£242 per week) equates to £12,570 per year. However, if you're self-employed with profits below £6,845, you can choose to make voluntary National Insurance contributions without owing Income Tax. The same applies if you're employed and earn below £242 per week.

Does Scotland use different tax bands?

Yes, Scotland has its own Income Tax rates. There are more bands than in the rest of the UK, and the rates differ depending on your income. You can check the Scottish Income Tax rates on the GOV.UK site.

Do students get a higher personal allowance?

No, students receive the same personal allowance as everyone else: £12,570 per year. There's no additional tax-free threshold for being a student.