Self-employed money guide

When you are self-employed, nobody deducts your tax, pays into your pension or pays you when you are ill. These are the habits to set up, starting with reserving tax.

Reserve tax the moment money lands

When a client pays you, part of that money is tax you will owe. The fix: the moment money comes in, move a percentage straight into a separate tax savings account and don't touch it. The money for the tax bill is then ready when it is due.

How much? For many sole traders, 20–25% of profit covers income tax and National Insurance with a little margin, and 25–30% adds headroom once earnings push toward the higher-rate band. The worked example below shows where those numbers come from. If in doubt, reserve more; any surplus carries into next year.

Worked example: the 2026-27 tax bill on £40,000 profit

Illustrative figures for a sole trader with £40,000 profit in 2026-27, no other income.

  • Income tax: the first £12,570 is covered by the personal allowance. 20% on the remaining £27,430 = £5,486.
  • Class 4 National Insurance: 6% on profits between £12,570 and £50,270 — 6% of £27,430 = £1,646.
  • Total: about £7,130 — roughly 18% of profit, which is why a 20–25% reserve is comfortable at this level.

If this is your first Self Assessment year, on 31 January you owe the £7,130 plus a first payment on account of £3,565 toward next year — £10,695 in one day — with another £3,565 due by 31 July. Reserving monthly from the start means the money is there.

Payments on account. If your Self Assessment bill is over £1,000 (and less than 80% of your tax was collected at source), HMRC requires two advance instalments toward next year's bill — half each, due 31 January and 31 July, based on this year's figure. They're a prepayment, not an extra tax, and they offset against next year's bill. In the first year, the January payment is 150% of that year’s bill. If you know your income is falling, you can apply to reduce them — carefully, because under-reducing means interest. Full detail is on GOV.UK.

Separate business and personal money

Open a separate account for the business, even as a sole trader. Money in, expenses out, tax reserved — all in one place, away from your personal spending. It makes your tax return easier and shows what you're earning. Add two savings pots, one for tax and one for your own buffer.

Claim every expense you're entitled to

Every legitimate business expense reduces your profit, and therefore your tax. Common expenses include use of home as an office (HMRC allows either actual costs or flat-rate simplified expenses), business mileage at HMRC's approved rates, the business share of your phone and broadband, software and subscriptions, professional insurance, training that updates existing skills, and accountancy fees themselves. Photograph every receipt the day you get it, into your bookkeeping app, and reconcile once a week.

Making Tax Digital

From April 2026, Making Tax Digital for Income Tax applies to sole traders and landlords with qualifying income over £50,000 — and that threshold is your gross income before expenses, not your profit. It means keeping digital records and sending HMRC quarterly updates through compatible software, with the thresholds dropping to £30,000 from April 2027 and £20,000 from April 2028. Records now need to be up to date every quarter, not once a year.

Choosing compliant software, setting up the digital records properly and handling the quarterly rhythm is exactly what Buzz Accounting does.

Pensions when self-employed

As an employee, auto-enrolment quietly built your pension. Self-employed, you have to set up your own. The tax relief still applies: basic-rate relief means £100 into a personal pension costs you £80, with relief on up to £60,000 a year (or 100% of earnings if lower).

With irregular income, some people pay a small fixed monthly amount and add lump sums in good months. Our pension reality check covers how pensions work, and a regulated adviser can help with pension decisions.

Sick pay

No work often means no income, with no employer sick pay behind you. Two things matter: an emergency fund, which with irregular income is often sized at six months or more, and income protection, an insurance policy that pays a regular income if illness or injury stops you working.

Smooth the lumpy cashflow

Pay yourself a consistent monthly ‘salary’ from the business account — set at what the business can sustain in a quiet month, not a good one — and leave the rest in the business as a buffer that carries you through lean patches, funds the tax pot and feeds the pension. In good months the buffer grows; in bad ones it pays you.

Set yourself up in an afternoon

  1. Open a business current account plus two linked savings pots: ‘Tax’ and ‘Buffer’.
  2. Adopt the rule: every time you're paid, move 25% to Tax before anything else.
  3. Put 31 January and 31 July in your calendar with a reminder a month ahead — the payments on account dates.
  4. Pick MTD-compatible bookkeeping software (or ask your accountant to) and photograph receipts as you go.
  5. Set your monthly ‘salary’ at quiet-month level, by standing order to your personal account.
  6. Look at pension options: our pension reality check explains personal pensions and tax relief.
  7. Check your protection: set an emergency fund target and find out what income protection would cost.

Questions and answers

How much should I put aside for tax?

Work from profit, not turnover. At around £40,000 of profit, income tax plus Class 4 National Insurance comes to roughly 18% of profit in 2026-27, so a 20–25% reserve gives comfortable margin. Once profits push past £50,270 you're into 40% tax territory on the top slice, so step the reserve up to 30% or more. If you reserve on every invoice as it's paid (before expenses), you can use a somewhat lower percentage since it's coming off gross income. Pick one rule and apply it every time money lands. Review the percentage once a year against your actual bill, and carry any surplus into next year.

Can I reduce my payments on account?

Yes. Payments on account assume this year will match last year, so if your income is falling — you've lost a big client, cut your hours, taken parental leave — you can apply to reduce them, online via your tax account or on form SA303. If you reduce them below what your actual bill turns out to be, HMRC charges interest on the shortfall, backdated to the original due dates. The reverse case needs no action — if income rises, the balancing payment the following January catches it up. If your bill was under £1,000, or over 80% of your tax was collected at source, payments on account don't apply to you at all.

Does Making Tax Digital apply to me?

Check your gross qualifying income — self-employment plus property income, before expenses. Over £50,000 in 2024-25 and you're in from April 2026; over £30,000 you join from April 2027; over £20,000, April 2028. Below that, the annual Self Assessment return continues for now. Being in scope means keeping digital records in compatible software and sending quarterly updates, each due the month after the quarter ends, with a year-end finalisation on top. The tax you pay doesn't change. You can move your books into software before your start date.

Do I still build up a State Pension now Class 2 has gone?

Yes. For most self-employed people it now happens automatically. The compulsory Class 2 charge was abolished in April 2024; if your profits are above £12,570 you get your National Insurance credit for the year without paying Class 2 at all, and between the small profits threshold (£7,105 in 2026-27) and £12,570 you're treated as covered too. The group that needs to act is those with profits below the small profits threshold — in low-profit or start-up years you can pay voluntary contributions to keep the year qualifying. Check your record on GOV.UK's State Pension forecast every year or two: around 35 qualifying years earns the full State Pension, and missing years are cheapest to fix early.

Should I become a limited company to save tax?

Less often than it used to. The tax gap between sole trader and limited company has narrowed substantially in recent years — corporation tax rose, dividend allowances shrank — so for many people around and below the £40,000–£50,000 profit mark it's now close to a wash once you add accountancy fees, payroll admin and the extra filing obligations. A company can still suit specific situations: strong profits you don't need to draw out and can leave in the business, liability risk you want ring-fenced, clients or agencies that require it, or plans to bring in partners or investment. Run the decision through an accountant with your own numbers.

Do I need an accountant as a sole trader?

Legally, no. Many sole traders with simple affairs self-file happily, especially below the MTD thresholds with simple expenses. Practically, an accountant earns their fee when any of these are true: you're in scope for Making Tax Digital, your expenses are messy or substantial, you're near the higher-rate threshold, you're weighing up incorporation, or the January deadline reliably becomes a panic. An accountant can find expenses and allowances you did not know to claim and help you avoid penalties. If you do self-file, still use proper bookkeeping software.

Related reading

How to build an emergency fund: three to six months of expenses, and how to build it.
How to protect your income: what happens to your income if you cannot work.
What your pension needs to look like: how much is enough, the rules, and when to start.
Understand your payslip — tax codes, National Insurance and take-home pay, decoded.
Survival budget calculator: the minimum your household needs each month, and how long your cash would last.
Managing your money, day to day: budgeting, saving and clearing debt.

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