Tax Planning for Sole Traders: A Practical Guide for 2026/27

As we enter the 2026/27 tax year (6 April 2026 to 5 April 2027), it is a good time to think about how you will manage tax throughout the year, not just at the deadline.

For most sole traders, tax planning is not about complex strategies. It is about staying organised, understanding what you owe, and setting money aside consistently so there are no surprises.

At Lava Sky Accounting, we support our self-employed clients with clear guidance and forward planning so tax never becomes a last-minute stress. If you would like to fine out more please get in touch.

This guide explains how to approach tax planning for the 2026/27 tax year in a simple and practical way.

Understand How You Are Taxed as a Sole Trader

As a sole trader, you are taxed on your business profit, not on the money you withdraw from the business.

For 2026/27:

• The Personal Allowance remains £12,570

• 20% basic rate applies up to £50,270 of total taxable income

• 40% higher rate applies above £50,270

• 45% additional rate applies above £125,140

National Insurance will also apply based on your level of profit.

For 2026/27:

• Class 4 National Insurance is charged at 6% on profits between £12,570 and £50,270

• An additional 2% applies on profits above £50,270

Although Class 2 National Insurance has been abolished, you still receive National Insurance credits if your profits exceed the Small Profits Threshold.

When estimating your tax bill, it is important to factor in both Income Tax and National Insurance, as together they determine your true liability.

Because thresholds remain frozen, even modest increases in profit can push more of your income into the higher-rate band over time.

Understanding this early in the year allows you to plan ahead.

Set Aside Tax Monthly (Not in January)

One of the most effective habits for sole traders is setting aside tax throughout the year.

Rather than waiting until January, consider:

• Transferring a percentage of profit into a separate tax savings account each month

• Reviewing profit quarterly to check whether that percentage needs adjusting

Your tax bill for 2026/27 will normally be due by 31 January 2028, and you may also need to make Payments on Account during the year.

Planning monthly removes pressure later.

Understand Payments on Account

If your tax bill exceeds £1,000, HMRC usually requires Payments on Account towards the following year’s tax.

These are typically due:

• 31 January (first instalment)

• 31 July (second instalment)

Payments on Account are generally based on the previous year’s tax bill. If your profits are increasing, this can create larger January payments than expected.

Understanding this system early in the tax year helps you prepare properly.

Keep Records Accurate and Up to Date

Accurate bookkeeping is the foundation of good tax planning.

Throughout 2026/27, ensure that:

• All income is recorded

• All allowable business expenses are captured

• Your bookkeeping software is kept up to date

This allows you to monitor profit levels during the year rather than discovering the position months later.

Making Tax Digital (MTD) for Income Tax

From April 2026, Making Tax Digital for Income Tax applies to sole traders with qualifying income over £50,000.

If this applies to you, you will need to:

• Register for Making Tax Digital with HMRC

• Keep digital records

• Submit quarterly updates to HMRC

• Use compatible software

• Keep digital records

• Submit quarterly updates to HMRC

• Use compatible software

Even if you are below the threshold, moving towards digital record-keeping now will make compliance easier in future.

You can read more about MTD for Income Tax in our detailed guide here.

Pension Contributions and Longer-Term Planning

For 2026/27, the standard Annual Allowance remains £60,000 (subject to tapering for higher earners).

Pension contributions attract tax relief at your marginal rate. This means they can be particularly beneficial if you fall into the 40% higher-rate band.

For many smaller sole traders, pensions are more about long-term financial planning than short-term tax reduction but they are worth reviewing during the year rather than leaving until March.

Review Before the End of the Tax Year

Although planning should happen throughout the year, it is still sensible to review your position before 5 April 2027.

Before the year ends, consider:

✔ Are your records fully up to date?

✔ Do you understand your likely tax bill?

✔ Are you close to entering the higher-rate tax band?

✔ Should any pension contributions be made before 5 April?

A short review before the deadline can prevent missed opportunities.

How Lava Sky Accounting Can Help

Tax planning for sole traders does not need to be complicated but it does need to be consistent.

At Lava Sky Accounting, we go beyond basic compliance. We help our self-employed clients:

• Estimate how much tax to set aside each month so there are no January surprises

• Model the impact of profit increases on Income Tax and National Insurance

• Plan for Payments on Account well in advance of deadlines

• Prepare properly for Making Tax Digital, including choosing and setting up suitable software

• Review profit levels during the year, not just after it has ended

Our aim is to give you clarity and confidence throughout the year, not just at tax return time.

If you would like support managing your tax position for 2026/27, please get in touch and we would be happy to discuss how we can help.