If you work for yourself, learning how to budget for your tax bill is part of running the business. Unlike an employee, you do not usually have an employer deducting all of your Self Assessment tax before the money reaches you.

That can create a nasty surprise if you spend everything coming into the business and only think about tax when the payment deadline arrives.

The better approach is to treat tax like any other business cost. Estimate what you are likely to owe, put money aside regularly and keep your records up to date so the eventual bill is something you have prepared for rather than something you fear.

About this episode

Moving from employment into self-employment changes your relationship with tax.

When you are employed, much of the administration happens before your wages reach you. Once you work for yourself, responsibility shifts.

You need to keep appropriate records, understand the profit your business is making, deal with your tax return and make sure the money is available when your tax becomes due.

That can sound exhausting, but the practical principle behind this episode is simple:

Tax is a cost. Budget for it before you spend the money elsewhere.

Think of your business as your employer

One useful mindset is to imagine that your business employs you.

As a sole trader, you and the business are not legally separate in the same way as a limited company. However, making a mental distinction can still be useful.

When money comes into the business, do not automatically treat every pound as available to spend personally.

Part of that money may eventually need to pay tax.

Separating those two ideas can make budgeting much easier. Instead of seeing one healthy bank balance and assuming it all belongs to you, you begin to recognise that some of it already has another job.

What is your tax bill based on?

For a self-employed business, tax is not simply calculated on the amount of money you invoice or receive.

The starting point is your business profit.

Broadly, we look at your business income and allowable expenses, together with the relevant accounting and tax adjustments, to arrive at the profit used for tax purposes.

Your eventual Self Assessment bill can also depend on other income, allowances, reliefs and your personal circumstances.

Depending on your circumstances and profit level, the bill may include Income Tax and National Insurance as well as other amounts collected through Self Assessment.

If you want to understand that distinction more clearly, see Profit for Tax Explained: Why Tax Profit Differs from Accounting Profit.

How much should you put aside for tax?

There is no single percentage that works for every self-employed person.

Your tax position depends on your profit, other income and individual circumstances. Payments on account can also affect how much cash you need at particular points in the year.

So rather than relying blindly on a fixed percentage, start with an estimate of your likely tax bill.

Then turn that estimate into a regular savings target.

For example, if your latest estimate suggests you will need £6,000 for tax over the year, you can begin thinking in terms of putting aside roughly £500 a month, adjusting the amount as your actual profit develops.

The important thing is not whether the first estimate is perfect.

What matters is that you are building the habit of reserving money instead of waiting until January and hoping the cash is available.

Open a separate account for your tax money

A separate savings account can make the discipline much easier.

If all of your business money sits in one account, the balance can give you a false sense of comfort.

Some of that money may already be needed for tax.

By moving your estimated tax amount into a separate account regularly, you create a clear boundary between money available for running the business and money reserved for HMRC.

You could transfer money monthly, weekly or whenever customers pay you. Choose a rhythm that fits the way cash enters your business.

The purpose is simple: ring-fence the tax money before you accidentally spend it.

Good records make tax budgeting easier

You cannot estimate your tax sensibly if you do not know what your business is earning and spending.

Good bookkeeping gives you that information.

Instead of waiting until the end of the year to discover your profit, keep your records up to date throughout the year. You can then review your income, expenses and estimated profit while there is still time to adjust your tax savings.

Digital accounting systems can make this much easier by reducing the manual work and giving you a more current view of the numbers.

Our guide to cloud accounting explains how online accounting systems can support better financial records and decision-making.

Making Tax Digital and your records

Digital record keeping has also become more important because Making Tax Digital for Income Tax now applies to some sole traders and landlords.

Whether you need to use it depends on your qualifying income and circumstances.

If Making Tax Digital applies to you, you need compatible software to maintain digital records and send the required updates to HMRC.

Because the qualifying rules and thresholds can change over time, check the latest GOV.UK guidance or speak to your accountant before deciding what applies to you.

Do not forget payments on account

Payments on account are one reason a Self Assessment bill can feel larger than expected.

They are advance payments towards your next tax bill.

Where they apply, there are normally two payments. Each is usually based on half of the relevant tax from the previous year.

The first payment is normally due on 31 January and the second on 31 July.

There are circumstances where payments on account are not required, so do not assume that everybody pays them.

The important budgeting lesson is to check whether they apply to you before deciding how much money you need to reserve.

For a fuller explanation, see Payments on Account Explained: What They Are, When to Pay and How to Reduce Them.

Review your tax estimate during the year

Your first estimate should not be your last estimate.

Business changes.

You may earn more than expected, incur additional costs, lose a customer, win a large project or generate income from somewhere else.

Any of those changes could affect the eventual tax bill.

So review your estimate periodically and adjust the amount you are saving.

If profit rises strongly, increase the amount you put aside. If your expected liability falls, you can reconsider the savings target based on the updated numbers.

This is much better than relying on a percentage you chose several years ago and never reviewing it.

A simple tax budgeting routine

You do not need to become a tax expert to build a useful routine.

Keep your records current. Know what you are earning and spending.
Estimate your taxable profit. Use your accounting information rather than gut feeling alone.
Estimate the tax liability. Include payments on account where relevant.
Ring-fence the money. Move it into a separate savings account.
Save regularly. Monthly, weekly or when customers pay you can all work.
Review the estimate. Update it as your business performance changes.
Check the final calculation. Do not treat your budgeting estimate as the actual tax return calculation.

The goal is not mathematical perfection every week.

The goal is to avoid reaching the tax deadline with no plan and no money set aside.

Why budgeting for tax reduces stress

An unexpected tax bill creates stress because two problems arrive at once.

First, you have the tax liability itself. Second, you have to find the cash to pay it.

Budgeting separates those problems.

You may not enjoy paying tax, but if you have already reserved the money, the payment becomes a planned business transaction rather than a financial emergency.

That is the real value of treating tax like any other cost.

FAQs

How do I budget for my tax bill when self-employed?

Estimate your likely tax liability from your expected profit, put money aside regularly in a separate account and review the estimate as your business performance changes.

What percentage should I save for tax?

There is no universal percentage that works for everybody. The amount depends on your profit, other income, allowances, reliefs and whether payments on account apply. Use an estimate based on your own circumstances rather than relying on a generic percentage.

Should I have a separate savings account for tax?

It can be very useful. Moving estimated tax money away from your everyday business account makes it easier to see what cash is genuinely available to spend.

What are payments on account?

Payments on account are advance payments towards your next Self Assessment bill. Where they apply, HMRC normally asks for two instalments, one in January and another in July.

Why are good records important for tax planning?

Good records help you understand your income, expenses and profit. That makes your estimated tax bill more useful and allows you to adjust the amount you save before the payment deadline arrives.

Do I need Making Tax Digital software?

Some sole traders and landlords now need to use Making Tax Digital for Income Tax based on their qualifying income and circumstances. Check the current GOV.UK rules to confirm whether and when you need to use compatible software.

Episode Timecodes

00:29 – Why self-employed businesses should budget for tax
01:13 – Moving from employment to self-employment
02:04 – Treating tax as a business cost
02:30 – Thinking of your business as your employer
03:13 – What self-employed tax is based on
04:31 – Income Tax and National Insurance
05:33 – Understanding payments on account
06:17 – Building the right tax budgeting mindset
06:37 – Using a separate account for tax
07:20 – Why good records matter
08:09 – Estimating what you owe
08:58 – Putting money aside regularly
10:35 – Final tax budgeting summary

Related episodes and guides

Key takeaway

Do not wait for the tax bill before you start thinking about the money.

Treat tax as a normal cost of being in business. Keep good records, estimate what you are likely to owe and move money aside regularly.

A separate tax account can help create the discipline, while regular reviews keep your estimate connected to what the business is actually doing.

Most importantly, remember that the money sitting in your business bank account is not necessarily all yours to spend.

Prepare for the tax before HMRC asks for it, and the eventual payment becomes far easier to manage.

Plan it, Do it, Profit.

Further Support

If you want help understanding your tax, profit and other business numbers, use our free online business calculators.

If you need help estimating your tax bill, preparing your Self Assessment or planning ahead for tax payments, you can contact us for an initial chat.

You can also watch more practical finance and tax support on the I Hate Numbers YouTube channel, or listen and follow on Apple Podcasts.

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How to Budget for Your Tax Bill When You’re Self-Employed