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Making Tax Digital is live — are you compliant or facing a £200 fine?
9 min read
Becoming self-employed is exciting — until your first Self Assessment tax bill arrives and you realise you haven't saved enough. HMRC has no mechanism to collect tax in real time from sole traders the way PAYE does from employees. Here's exactly how much to set aside to avoid a nasty surprise.
What Tax Do Self-Employed Workers Pay?
- Income Tax: 20% on profits between £12,570–£50,270; 40% above £50,270
- Class 4 National Insurance: 6% on profits between £12,570–£50,270; 2% above £50,270 (as of 2024)
- Class 2 NI: Abolished from April 2024 — you no longer pay the weekly £3.45 flat rate
The "Put Aside" Percentages
| Annual Profit | Set Aside Each Month | Annual Tax Bill (approx.) |
|---|---|---|
| £15,000 | 6–8% of income | ~£490 |
| £25,000 | 18–20% | ~£2,686 |
| £35,000 | 22–25% | ~£5,186 |
| £50,000 | 27–30% | ~£10,636 |
| £75,000 | 35–38% | ~£24,436 |
As a simple rule: set aside 25–30% of everything you earn if you're not sure. Adjust quarterly once you have a clearer picture of your annual profit.
The Payments on Account Trap
In your second year of self-employment, HMRC introduces "Payments on Account" — advance payments toward next year's estimated tax bill. These are 50% of your previous year's bill, paid twice (31 January and 31 July). In the worst case scenario (your first tax bill was large and you didn't expect Payments on Account), you can owe 150% of your expected tax bill in one January. Plan for this.
Sole Trader vs Limited Company: Which Pays Less Tax in 2026?
For profits below £25,000/year: sole trader is usually simpler and similar in tax. For profits above £50,000: limited company typically becomes more efficient because Corporation Tax (25%) is lower than 40% income tax on the excess, and you can extract profit as dividends (taxed at 8.75% basic rate) rather than income. The break-even point is roughly £30,000–£40,000 in profit.
Frequently Asked Questions
When is my first tax bill due?
31 January following the end of your first tax year. If you started self-employment in September 2025, your first bill covers 6/4/2025–5/4/2026 and is due 31 January 2027. You may also face Payments on Account due the same day.
What records do I need to keep?
All income received, all allowable expenses, and bank statements. HMRC recommends keeping records for 5 years. From April 2026, if your profit exceeds £50,000, you must also keep digital records under Making Tax Digital rules.
Calculate your self-employment tax with our Self-Employed Tax Calculator.