Year-End Tax Planning for Sole Traders: What to Do Before 5 April 2026
As we near the end of the 2025/26 tax year, sole traders have a valuable window of time to review their income, expenses, and overall tax position before 5 April 2026. With frozen allowances, changes to Making Tax Digital on the horizon, and tighter margins across the board, it’s more important than ever to take a proactive approach to your year-end planning.
Unlike limited companies, sole traders are taxed on profits as individuals — so your decisions now can affect not only your income tax and National Insurance bill, but also your eligibility for benefits, student loan repayments, and payments on account for 2026/27.
In this guide, we set out the key areas to review before the end of the tax year, and how to legally reduce your tax bill while strengthening your business.
1. Get your records up to date — and digital
If you haven’t already moved to digital bookkeeping, now is the time.
Although Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) won’t apply until April 2026 for sole traders earning over £50,000, getting into the habit now will make that transition smoother — and help you make better tax decisions in the meantime.
Whether you use Xero, QuickBooks, FreeAgent, or specialist self-employed apps, keeping clear, real-time records will allow you to:
- Track profit more accurately
- Identify allowable expenses
- Avoid surprises when payments on account are due
- Spot if you’ve crossed VAT thresholds or benefit limits
Merranti clients already using cloud software are in a strong position for the 2026 MTD switchover — but if you’re still using spreadsheets or paper, let’s talk.
2. Review your allowable expenses
Sole traders are taxed on profit, not income — so claiming every legitimate expense is essential. Before 5 April, check that you’ve included:
- Mileage and travel (recorded correctly with logs)
- Home office costs (flat rate or proportion of actual bills)
- Equipment, subscriptions, and tools
- Mobile phone or broadband used for business
- Marketing, training, and CPD
- Bank charges and business insurance
- Subcontractors or freelance help
It’s not too late to correct underclaimed expenses or record items you’ve missed. But keep in mind: personal costs are not allowable, and HMRC is stricter than ever on borderline claims.
3. Use capital allowances strategically
If you’ve bought equipment, tools, or business-use vehicles during the year — or plan to before 5 April — you may be able to claim capital allowances.
Most sole traders use the Annual Investment Allowance (AIA), which lets you deduct the full cost of qualifying items (up to £1 million) against your profits in the year of purchase.
Common examples:
- Computers, laptops, phones
- Vans, tools, machinery
- Office equipment
- Business furniture
If you’re on the cash basis, you may instead deduct capital costs directly as an expense — a simpler route, but with limits on cars and certain assets.
Tip: If your profits are unusually high this year, consider bringing forward asset purchases to reduce your 2025/26 tax bill.
4. Consider switching to the cash basis
From 2024/25, the cash basis is now the default for most sole traders — and the limit has been removed. That means many more businesses can use this simpler method of calculating taxable profit.
Under the cash basis:
- You only pay tax on money actually received, not invoiced
- You claim expenses when paid, not when incurred
- You avoid complex adjustments for debtors, prepayments, etc.
It won’t suit everyone (e.g. those with large stock, asset-heavy businesses, or significant financing costs), but for service-based sole traders, it can reduce admin and improve cash flow.
If you’re not sure whether you’re using the cash basis or traditional accruals, Merranti can review your records and help you switch before filing.
5. Top up your pension — and cut your tax
One of the best tax planning tools available is a personal pension contribution.
As a sole trader, you can’t make employer contributions like a company director — but you can make personal contributions, and claim basic-rate tax relief.
In 2025/26, the standard annual contribution limit is £60,000, or 100% of your earnings — whichever is lower. Contributions:
- Reduce your taxable income
- Help reclaim personal allowance if income > £100,000
- May reduce student loan or child benefit clawbacks
- Grow tax-free until retirement
If you’re expecting a high profit year, this is one of the few options to bring your taxable income down after the year ends (via carry back), if paid into a pension by 5 April.
6. Plan for payments on account
If your tax liability for 2024/25 was over £1,000, you’re probably already making payments on account — advance tax payments towards the current year (2025/26).
By 31 January 2026, you’ll need to pay:
- Your balancing payment for 2024/25 (if anything remains)
- The first payment on account for 2025/26 (usually 50% of last year’s tax)
If your income has dropped significantly this year, or your profits are lower than the previous year, you can apply to reduce your payments on account — but do this carefully, as underpayments lead to interest.
Don’t wait until January. We can estimate your 2025/26 profits and adjust payments based on actual data before the deadline.
7. Avoid crossing into higher tax or benefit clawbacks
In 2025/26, several tax thresholds remain frozen, creating hidden tax traps:
- The personal allowance starts to taper away above £100,000
- Child benefit is clawed back if income > £50,000
- The 60% effective tax band between £100,000 and £125,140 still applies
- The dividend allowance is now only £500, so mixed income needs review
If you’re close to any of these bands, we can help you plan strategies to reduce your income — e.g. through pension contributions, legitimate expenses, or delaying income into 2026/27.
8. Wrap up any loss-making activity
If you’ve had a difficult year and made a loss, it’s important to report it correctly.
Sole trader losses can potentially be:
- Carried forward against future profits
- Offset against other income (e.g. PAYE job)
- Carried back to prior years (in some cases)
Loss relief claims need to be made clearly in your return, with records to back them up. Don’t waste a tax-saving opportunity by skipping this section or delaying filing.
Final thoughts
Being a sole trader offers simplicity, control, and flexibility — but it also means taking full responsibility for your tax. With the personal allowance, thresholds, and NIC bands frozen yet again, proactive planning before 5 April 2026 can save you hundreds (or even thousands) in tax.
The earlier you review your records, expenses, profits, and contributions, the more room you’ll have to make adjustments — and avoid January panic.
At Merranti Accounting, we help sole traders across all sectors stay compliant, reduce their tax, and prepare for the changes coming with MTD in 2026. Whether you need help with software, pension strategy, expenses, or payments on account — we’re ready when you are.
Sole trader? Unsure what to do before 5 April?
Book your Year-End Review with Merranti now and get a clear, confident plan for 2025/26.
