If you're looking for property-specific tax (SDLT, capital gains, landlord income tax), see the Buy-to-Let Tax Explained instead. This guide covers general tax planning basics for the self-employed and business owners: self-assessment deadlines, the payments on account mechanism that catches many people out, allowable expenses, and legitimate planning approaches.
1. Self-assessment deadlines
| Date | What's due |
|---|---|
| 6 April | New tax year begins |
| 31 October (paper returns) | Deadline for paper self-assessment returns |
| 31 January | Online return filing deadline AND balancing payment plus first payment on account due |
| 31 July | Second payment on account due |
2. Payments on account — the first-year shock
This is the single most common, most expensive surprise for newly self-employed people. If your tax bill is above a certain threshold, HMRC requires you to make "payments on account" — advance payments toward next year's tax bill, in addition to settling what you actually owe for the year just finished. This means your first major tax payment can be significantly larger than your actual tax bill for the year.
| Payment | Amount | Due |
|---|---|---|
| Balance owed for the tax year just finished | £8,000 | 31 January |
| First payment on account (50% of that year's bill, toward next year) | £4,000 | 31 January (same date) |
| Total due on 31 January | £12,000 | — |
| Second payment on account (the remaining 50%) | £4,000 | 31 July |
In this example, an actual tax liability of £8,000 results in £16,000 being paid across the two payment dates within the same 12-month period — your full year-1 bill, plus a full advance instalment toward year 2. This isn't a penalty or an error; it's how the system is designed to work, but it genuinely surprises people who haven't budgeted for it, and it's the single most common cause of a cash flow crisis in a business's first profitable year.
3. Allowable business expenses
The general rule is that an expense must be incurred "wholly and exclusively" for business purposes to be tax-deductible — genuine business costs (materials, professional fees, business-specific equipment, a proportionate share of home-working costs) generally qualify, while personal expenses, however loosely connected to the business, generally don't. Keeping clear, contemporaneous records of what was purchased and why is worth doing from the outset, since reconstructing this months or years later is genuinely difficult and HMRC can query expense claims as part of a wider review.
4. Legitimate tax planning approaches
Legitimate tax planning uses the rules and allowances Parliament has deliberately put in place (pension contributions, the personal allowance, ISA allowances, legitimate business expense claims) to reduce your tax bill within the law. Tax evasion — deliberately concealing income or falsely claiming expenses — is illegal and carries serious consequences. The distinction matters, and a good accountant will only ever advise within the legitimate planning category.
Common legitimate approaches include pension contributions (which reduce your taxable income while building retirement savings — covered in more depth in the Pension and Property guide), timing significant equipment purchases to fall within the most tax-advantageous year where genuinely flexible, and structuring income between salary and dividends tax-efficiently if operating through a limited company (see the Director Mortgage Guide for how this also affects mortgage assessment).
5. Making Tax Digital — what it means for you
Making Tax Digital for Income Tax (MTD ITSA) requires affected taxpayers to keep digital records and submit quarterly updates to HMRC, rather than the traditional single annual return. The rollout applies progressively by income threshold — those with the highest qualifying income become mandated first, with lower thresholds following in subsequent years. If this applies to you, moving to compatible digital record-keeping software well before your mandatory start date avoids a last-minute scramble.
6. Common mistakes
- Not setting aside money for tax as income is earned. A simple habit of moving a percentage of each payment received into a separate savings account specifically for tax avoids the scramble to find a lump sum at deadline time.
- Forgetting that payments on account exist until the first big bill arrives. Understanding this mechanism before your first profitable year removes the shock entirely.
- Poor expense record-keeping. Keep receipts and a simple log as you go, not reconstructed from memory months later.
- Confusing tax planning with tax evasion. Stick to legitimate, well-established reliefs and allowances, and use a qualified accountant if you're ever uncertain whether something is legitimate.
7. Frequently asked questions
Can I reduce my payments on account if I expect next year's income to be lower?
Yes — you can apply to HMRC to reduce your payments on account if you genuinely expect your tax liability to be lower in the coming year. This needs to be a realistic estimate, not a guess used to defer payment, since underpaying based on an inaccurate reduction can result in interest charges on the shortfall once your actual liability is confirmed.
How much should I set aside for tax as a new self-employed person?
A commonly used starting rule of thumb is setting aside around 25–30% of profit for tax and National Insurance combined, though the genuinely correct figure depends on your specific income level and any other income sources. This is a starting estimate, not a guarantee — a proper calculation, or an accountant's guidance, gives a more accurate figure for your specific circumstances.
Do I need an accountant, or can I manage my own tax?
Many sole traders with straightforward affairs manage their own self-assessment successfully, particularly with good record-keeping habits from the start. As complexity grows — limited company structures, multiple income sources, or genuine uncertainty about what's allowable — a qualified accountant's fee is often worth it for both the time saved and the reduced risk of a costly mistake.
What happens if I miss a self-assessment payment deadline?
HMRC charges interest on late payments from the due date until paid, and separately can apply penalties for late filing of the return itself (distinct from late payment of the tax owed). If you know in advance you'll struggle to pay by the deadline, contacting HMRC proactively to discuss a Time to Pay arrangement is generally a better approach than simply missing the deadline and waiting to be contacted, since this can reduce the consequences and demonstrates you're engaging with the obligation responsibly.
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