How to Budget for Your Tax Bill as a Sole Trader

One of the biggest financial challenges for self-employed people is the tax bill. Unlike employees, sole traders don’t have tax deducted at source — it all comes due in one (or sometimes two) large payments. Getting this wrong can cause serious cash flow problems. Getting it right is straightforward once you have a system.

Why the January Bill Surprises So Many People

In your first year of self-employment, it’s easy to assume the money sitting in your account is yours to spend. By the time 31 January arrives, many sole traders discover they owe more than they have available — particularly if they’re also required to make payments on account for the following year on top of the current year’s bill.

The solution is simple: set aside a proportion of your income throughout the year, as if paying yourself tax in real time.

How Much Should You Set Aside?

A commonly used rule of thumb is to put aside 25–30% of every payment you receive into a separate savings account. This covers Income Tax, National Insurance, and gives you a small buffer. Here’s a rough breakdown for a sole trader earning £35,000 profit in Scotland for 2025/26:

• Income Tax (after Personal Allowance): approximately £4,500
• Class 2 NI: approximately £180
• Class 4 NI: approximately £2,050
• Total: approximately £6,730 — around 19% of profit

Setting aside 25–30% gives you a comfortable margin, accounting for the fact that your actual profit may be higher than you estimate, or that you’ll owe payments on account as well.

Use a Separate Account

The most effective way to do this is to open a dedicated savings account — ideally one that earns interest — and transfer your tax reserve into it each time you’re paid. Treat this money as untouchable. Many sole traders use an easy-access savings account or a business savings account for this purpose.

If you invoice clients and payments arrive irregularly, transfer your reserve the moment you receive each payment rather than waiting until the end of the month.

Know Your Key Dates

There are two key payment dates for most sole traders:

• 31 January — balancing payment for the previous tax year + first payment on account for the current year
• 31 July — second payment on account for the current year

If you know roughly what you’ll owe by October or November, you have time to prepare — and you might even earn a little interest on the money you’ve been saving in the meantime.

Get Your Accounts Done Early

The earlier you complete your Self Assessment return, the earlier you know exactly what you owe. Filing in October or November rather than January gives you two to three months’ notice of your bill — time to ensure the funds are available and to plan your cash flow accordingly.

Good bookkeeping throughout the year is what makes this possible. If your records are up to date, your return can be prepared quickly once the tax year ends in April.

What If You Can’t Pay?

If you genuinely can’t pay your bill in full, contact HMRC before the deadline rather than after. They offer Time to Pay arrangements which allow you to spread the cost over manageable monthly instalments — you can find out more on HMRC’s payment difficulties page. Proactive communication is always better than silence — HMRC’s response to people who engage with them is very different to those who ignore the problem.

Let PBAS Help You Plan Ahead

PBAS keeps the books for sole traders across Scotland and can give you a clear picture of your expected tax liability well before January arrives. If you’d like help with your bookkeeping or Self Assessment, get in touch.