Oliver Bennett
If you are self-employed, Self Assessment is one of those jobs that is very easy to put off — until January arrives and you find yourself hunting through a shoebox of receipts at ten o'clock at night. The good news is that a handful of simple habits, started now rather than in the depths of winter, will make the whole process calmer, cheaper and far less stressful.
Set money aside for tax as you earn it
The single biggest cause of January panic is not having the money when the bill lands. Tax on self-employed profits is not deducted at source, so every payment you receive is effectively gross — and it can feel like yours. It isn't.
A workable rule of thumb is to move a set percentage of every payment into a separate account the moment it arrives, before you spend anything. For a basic rate taxpayer, income tax plus Class 4 National Insurance usually works out somewhere between 20% and 30% of profit, so 25% is a sensible starting point. If you are a higher rate taxpayer, or you have student loan repayments, or you are close to the VAT threshold, set aside more.
- Open a second account — a plain savings account is fine. Call it "tax" so there is no temptation.
- Transfer on receipt, not monthly. A percentage of each invoice paid is easier to keep track of than trying to guess a monthly figure.
- Leave it alone. It is not a buffer for a quiet month or a new laptop. If you dip in, you will have to find it again in January.
Track your expenses throughout the year
Chasing twelve months of receipts in one weekend is miserable and error-prone. Ten minutes a week is much better. Photograph every receipt as you get it, keep a folder for the digital copies, and note the business reason for anything unusual while you still remember it.
Common allowable costs for sole traders and freelancers include:
- Office costs, stationery and postage
- A reasonable proportion of phone, broadband and heating if you work from home
- Software, subscriptions and professional fees
- Business insurance and bank charges on a business account
- Travel to clients and temporary sites, plus mileage on your own vehicle
- Training that updates existing skills, rather than retrains you into something new
Equally, know what you cannot claim, so you do not have to unpick it later: ordinary commuting, everyday clothing, client entertaining and fines are all off the menu. Keep business and personal spending in separate accounts if you can — it makes the year-end work dramatically quicker.
Understand payments on account so the bill doesn't shock you
This catches out almost every new sole trader. If your tax bill is more than £1,000, HMRC will normally ask for payments on account — two instalments, due on 31 January and 31 July, each worth half of the previous year's liability.
So your first January can involve paying last year's bill plus half of this year's, which is roughly one and a half times what you expected. It is not a penalty and it is not an error, but it does need budgeting for. If your profits have genuinely dropped, you can apply to reduce the payments — just be careful, because reducing them too far leads to interest and surcharges later.
File early and sidestep the January rush
The filing deadline is 31 January for online returns, and 31 October if you file on paper. Newly self-employed? You generally need to tell HMRC by 5 October following the end of your first tax year.
The deadline is the last possible day, not a target. Once you have your figures — usually by late April or May — you can submit the return straight away and know exactly what you owe. You still pay in January, so nothing is lost, but you have six months of certainty and no risk of a last-minute website wobble.
Late filing penalties start at £100 even if you owe no tax at all, then rise by £10 a day after three months, up to a maximum of £900. Late payment adds a 5% surcharge at 30 days, six months and twelve months, plus daily interest. If you genuinely cannot pay on time, contact HMRC and ask about a time to pay arrangement rather than ignoring it.
Claim the small allowances and keep your records
Two allowances are quietly missed every year. The trading allowance lets you deduct £1,000 from trading income instead of itemising expenses, if your costs are lower than that. And simplified expenses give you flat rates for mileage (45p per mile for the first 10,000 miles in a car or van, 25p thereafter) and for working from home (between £10 and £26 a month, depending on hours).
Finally, keep your records for at least five years after the 31 January filing deadline. Invoices, bank statements, receipts and a simple spreadsheet of income and costs are enough — you do not need complicated software to be organised. Do this well and next January becomes a short admin task rather than a scramble.
