One of the biggest mistakes new sole traders make is spending everything that comes in without saving for tax.
When you are employed, tax is usually taken from your wages before you receive them. As a sole trader, it works differently. You are responsible for reporting your income and paying the tax yourself through Self Assessment.
The short answer is yes — sole traders should regularly put money aside for tax. This helps avoid a surprise bill when your tax return is due.
Why sole traders need to save for tax
As a sole trader, your business income belongs to you, but that does not mean all of it is available to spend.
You may need to pay Income Tax and National Insurance on your profits. Your profit is broadly your business income minus allowable business expenses.
If you do not save throughout the year, the tax bill can feel much harder to manage.
How much should you put aside?
There is no single amount that works for everyone because your tax depends on your profit, other income, allowances and personal circumstances.
However, many sole traders choose to move a percentage of each payment into a separate savings account. This creates a tax pot that builds throughout the year.
The right percentage depends on your expected profit and wider income position, so it is worth getting advice if you are unsure.
Why a separate tax account helps
A separate savings account can make tax planning much easier.
It helps you avoid accidentally spending money that will later be needed for HMRC. It also gives you a clearer view of what money is available for personal use and what should be kept aside.
This is a simple habit, but it can prevent a lot of stress.
Don’t forget payments on account
Some sole traders may need to make payments on account. These are advance payments towards the next tax year’s tax bill.
This can surprise people in their first year because the amount due may be higher than expected.
If you are new to Self Assessment, it is worth understanding how payments on account work before the deadline arrives.
Common mistakes sole traders make
Common mistakes include:
- Spending all income as it comes in
- Forgeting that tax is paid later
- Not budgeting for National Insurance
- Ignoring payments on account
- Mixing tax savings with everyday spending
- Leaving tax planning until January
- Not checking profit during the year
These mistakes can lead to cashflow problems even when the business is profitable.
Review your profit regularly
Tax planning is easier when your bookkeeping is up to date.
Reviewing your income and expenses regularly helps you estimate your likely profit and prepare for future tax bills.
If your income increases during the year, you may need to increase the amount you are setting aside.
Final thoughts
Putting money aside for tax is one of the best habits a sole trader can build.
It keeps your finances organised, reduces stress and helps you avoid being caught out by Self Assessment deadlines.
If you are unsure how much to save or how your tax bill may be calculated, Merranti Accounting can help you understand your position and plan ahead.
Written by Steve Watts
