One of the biggest shocks for newly self-employed people is the January tax bill. Unlike employed people who pay tax monthly through PAYE, sole traders pay in large lump sums — and without planning, this can be genuinely difficult to manage.
How Much Should You Set Aside?
A rough rule of thumb: set aside 25–30% of your profits for tax and National Insurance. This covers income tax, Class 2 and Class 4 NI. If you’re a higher-rate taxpayer (profits over £50,270), set aside 40–45%.
💡 Key takeaway
A rolling 3-month cash flow forecast is more valuable than any annual budget — it shows exactly when you’ll run short before it happens.
Use a Separate Tax Account
Open a separate bank account dedicated to tax. Each time you receive income, transfer your tax percentage immediately. This makes tax planning automatic and prevents accidental spending of money that belongs to HMRC.
Quarterly Reviews
Review your profit and tax estimate quarterly. If you’ve had a good quarter, your tax provision should increase accordingly. If you’ve had a quiet quarter, adjust downward. Your bookkeeper can provide quarterly management accounts that make this simple.
Payments on Account
If your tax bill exceeds £1,000, HMRC requires advance payments on account — 50% of the previous year’s bill due 31 January and 50% due 31 July. New business owners often don’t budget for this in their first year, leading to a double bill.
Working With a Bookkeeper
A good bookkeeper provides regular profit updates and tax estimates throughout the year, so there are never any surprises. Some offer quarterly tax planning reviews as part of their service.
Frequently Asked Questions
When do I pay self assessment tax?
31 January for the prior tax year, plus payments on account due 31 January and 31 July if your bill exceeds £1,000.
What if I can’t afford my tax bill?
Contact HMRC before the deadline to arrange Time to Pay. Interest accrues on overdue tax but penalties are avoided if you communicate proactively.
Can my bookkeeper estimate my tax liability during the year?
Yes — regular management accounts and tax estimates are a standard part of our bookkeeping service.
