Being your own boss comes with a lot of freedom, but it also means dealing with one of the trickiest parts of self-employment: saving for tax.
When your income isn’t consistent, it can be tough to know how much to set aside or stick to a regular savings habit. But building a tax buffer doesn’t have to be overwhelming. With a bit of planning (and the right tools), you can take the stress out of your taxes.
Let’s find out how.
What is a tax buffer?
A tax buffer is money you set aside gradually throughout the year to cover your Income Tax and National Insurance bill.
Unlike employees, tax doesn’t come out of your income automatically when you’re self-employed. So, if you don’t plan ahead, your January tax bill can feel like a nasty surprise.
Building a buffer helps you:
- Avoid dipping into savings or taking on debt when tax is due
- Feel more in control, even when your income fluctuates
- Keep your stress levels to a minimum
Why can fluctuating income be a problem?
One of the biggest challenges of saving for tax is not knowing exactly how much you’l learn from month to month. Some months are booming, while others are quieter.
That’s why a fixed savings plan doesn’t always work. Instead, it makes sense to have a more flexible system in place. Let’s take a look at how that could work.
5 practical tips to build your tax buffer
1. Start with a percentage rule
As a rough guide, set aside 20% to 30% of everything you earn. If you’re a higher-rate taxpayer, aim for more.
It doesn’t have to be perfect every time, but building the habit of saving as you earn makes a big difference.
- Tip: Coconut automatically calculates how much tax you owe based on your real income, so you always know what to put aside.
2. Open a separate tax savings account
Keep your tax buffer separate from your everyday business spending. That way, it’s not accidentally spent on any surprise business expenses.
3. Adjust when income changes
If you’ve had a quiet month, it’s okay to save a bit less, but when business is booming, why not give yourself peace of mind and set more aside?
4. Use software like Coconut to track your tax bill
There’s no need to wait to find out how much you owe. Use simple accounting software like Coconut to:
- Track your income and expenses automatically
- Estimate your tax in real time
- Know where you stand all year round
This removes the guess work and helps you avoid under-saving.
5. Make saving automatic
If you can, automate a transfer every time you get paid, even if it’s just a small percentage. Set it and forget it, and your tax buffer will quietly grow in the background.
Aim for more than just tax
While your buffer should cover your tax bill first, it’s also smart to build to build a bigger safety net if you can, for things like:
- Unexpected expenses
- Late payments
- Quiet periods
How Coconut makes your finances simple
Coconut makes invoicing and expense management for sole traders and landlords a breeze.
With Coconut, you can:
