How do I budget for tax if I’m self-employed?

Income tax when self-employed

If you’re self-employed, you’ll usually pay Income Tax on your taxable business profits. Your taxable profit is generally your business income less any allowable business expenses.

Unlike employees, who usually pay Income Tax through PAYE, self-employed individuals are responsible for reporting their business income and paying any tax due to HMRC.

How you report your income depends on your circumstances. Some self-employed people currently report their income through Self Assessment, while others will move to Making Tax Digital (MTD) for Income Tax as it is introduced.

The amount of Income Tax you pay depends on your total taxable income for the tax year and the Income Tax bands that apply at the time.

When budgeting for tax, it’s a good idea to set aside money regularly throughout the year rather than waiting until your tax bill is due. Many business owners transfer a percentage of each payment they receive into a separate savings account to help ensure the funds are available when tax becomes payable.

National Insurance Contributions when self-employed

As well as Income Tax, you may also need to pay National Insurance contributions (NICs) if your business profits are above the relevant thresholds.

Paying National Insurance can help you qualify for certain state benefits, including the State Pension. Even if your profits are below the threshold for paying National Insurance, you may still be able to protect your National Insurance record through National Insurance credits or voluntary contributions, depending on your circumstances.

Like Income Tax, any National Insurance you owe is normally reported and paid through your tax return.

If you’re budgeting for your tax bill, remember to include both Income Tax and any National Insurance contributions you expect to pay.

How much National Insurance will I pay?

The amount of National Insurance you pay depends on your business profits and the National Insurance rules that apply for the relevant tax year.

If you’re self-employed, you may need to pay Class 4 National Insurance contributions on your profits. Depending on your level of profits, you may also receive National Insurance credits or be able to make voluntary contributions to help protect your entitlement to the State Pension and certain other benefits.

When budgeting for tax, remember that your National Insurance contributions are usually paid alongside your Income Tax, so it’s important to set aside enough to cover both.

For more information about how National Insurance is calculated, see our guide to National Insurance for sole traders.

How to report and pay Income Tax and National Insurance when self-employed

How you report your income depends on whether you’re using Self Assessment or Making Tax Digital (MTD) for Income Tax.

If you complete a Self Assessment tax return, you’ll normally report your income and expenses after the end of the tax year. If you’re within MTD for Income Tax, you’ll keep digital records and submit updates to HMRC throughout the year using compatible software before completing a final declaration.

Making Tax Digital changes how you report your income, but it does not currently change the way Income Tax is paid. If you’re required to make payments on account, these will generally continue to apply, with payments normally due on 31 January and 31 July.

Whatever reporting method applies to you, setting money aside throughout the year can help ensure you have enough available when your tax payments fall due.

Tips for budgeting for tax throughout the year

Budgeting for tax doesn’t have to be complicated. A few simple habits can help you avoid unexpected bills and make it easier to manage your cash flow.

• Set money aside regularly. Rather than waiting until your tax bill is due, transfer a percentage of each payment you receive into a separate savings account that’s reserved for tax.
• Keep your business records up to date. Recording your income and expenses regularly will give you a better idea of your taxable profit and help you estimate how much tax you may owe.
• Remember National Insurance. When setting money aside, don’t forget to budget for any National Insurance contributions as well as Income Tax.
• Plan for payment deadlines. Regardless of how you make your Self Assessment submission, remember that you may need to make payments on account as well as your balancing payment. If you’re within Making Tax Digital (MTD) for Income Tax, you’ll receive more regular information about your tax position, helping you plan ahead.
• Review your budget regularly. If your business grows or your profits change during the year, review the amount you’re setting aside so your budget stays on track.

Budgeting throughout the year can help you spread the cost of your tax bill and reduce the risk of cash flow problems when payment deadlines arrive.