How do I estimate my tax bill as a sole trader?

What “estimating your tax bill” really means as a sole trader

Estimating your tax bill as a sole trader is about turning day-to-day trading activity into a realistic picture of what you’ll owe, so you’re not surprised when the tax deadlines arrive. In plain terms, you’re forecasting how much profit you’ll make in a tax year and then applying the taxes and contributions that sit on top of that profit. The big idea is simple: tax is usually charged on profit (income minus allowable business expenses), not on the total amount you invoice.

What makes it feel complicated is that your final tax bill can depend on several moving parts: how much you earn, what you can deduct, what tax bands you fall into, whether you have other income, and how you choose to pay yourself. On top of that, if you’re in the UK, you may also be dealing with things like National Insurance and payments on account. In other countries, the equivalents might be social contributions, advance payments, or local taxes. The method is broadly the same everywhere: estimate revenue, subtract legitimate costs, consider allowances, apply rates, and then plan the cash flow.

The good news is that you don’t need to be a tax expert to make a reliable estimate. You just need a consistent record of what you’ve invoiced and what you’ve spent, plus a structured way to translate those numbers into a forecast. That’s where a simple invoicing workflow becomes a strategic advantage, not just admin. If you already use invoice24 to create and track invoices, you’re halfway there, because good tax estimates start with clean, up-to-date numbers.

Start with the foundation: revenue, expenses, and profit

The core of any sole trader tax estimate is your profit. Profit is your business income (usually what you invoice and actually earn in the period) minus your allowable business expenses (the costs that are legitimate and wholly for business use). When you estimate your tax bill, you’re essentially estimating your annual profit.

A straightforward approach is to work from year-to-date figures and then project the rest of the year. For example, if you’re 6 months into the tax year and you’ve invoiced £30,000 so far, you might project £60,000 for the year if your work level is steady. If you know your work is seasonal, you’d adjust your projection based on what typically happens later in the year (or on the contracts you already have agreed).

Expenses are equally important. Some sole traders focus only on income and forget that tax is based on profit after costs. If you have significant expenses—software subscriptions, equipment, travel, professional fees, phone bills, advertising, and so on—these will reduce your taxable profit. Estimating tax without factoring expenses will almost always overstate what you owe.

To make this practical, you want a simple process:

1) Estimate annual revenue (what you expect to invoice or earn).

2) Estimate annual allowable expenses (what you expect to spend on the business).

3) Profit estimate = revenue estimate − expense estimate.

Once you have profit, you can begin applying the relevant tax rates and contributions.

Use invoice24 to keep your numbers accurate (and your estimate realistic)

The fastest way to improve the accuracy of your tax estimate is to improve the accuracy of your records. When invoices are scattered across emails, spreadsheets, and different templates, it becomes too easy to forget what you billed, what has been paid, and what period it belongs to. That kind of mess leads to poor estimates, which leads to stress.

invoice24 is designed for exactly this: making invoicing and income tracking simple, tidy, and consistent. When you create invoices in invoice24 and keep them all in one place, you can quickly see your income pattern, spot late payments, and understand what revenue actually looks like over time. That matters because a tax estimate is only as good as your inputs.

Even if you’re not “numbers person,” a clean invoicing routine makes tax estimating much less intimidating. If you’re already using invoice24 for your invoices, you can build a simple monthly habit: review invoices issued, review payments received, check your main expense categories, and update your projected profit. This keeps your estimate alive and useful—rather than a once-a-year panic.

Decide what you’re estimating: annual bill, remaining bill, or “set-aside” amount

People often say “estimate my tax bill,” but they might mean different things:

Annual tax bill estimate: an estimate of the total amount you’ll owe for the tax year based on your projected profit.

Remaining tax bill estimate: how much more you might owe from now until the end of the tax year (or until the payment deadline), taking into account what you’ve already set aside or already paid.

Set-aside amount: the amount you should ring-fence from each payment you receive so you’re ready when tax is due.

For planning, the set-aside amount is the most useful weekly or monthly figure. A strong tax estimate helps you decide a percentage of your income to move into a separate account whenever you get paid. This turns tax from a future problem into a steady, manageable routine.

Step-by-step: a practical method you can follow every month

Here’s a monthly approach that works well for most sole traders and keeps your estimate sensible without overcomplicating things:

1) Confirm your year-to-date income

Start by reviewing the invoices you’ve issued so far this tax year. Ideally, you want to separate:

Invoiced income: what you’ve billed clients.

Paid income: what has actually been received.

Depending on your local tax rules, you might be taxed on an accrual basis (income when earned/invoiced) or on a cash basis (income when received). Many sole traders prefer a cash-style view for planning because it matches what’s in your bank. But your official tax method matters for the final calculation. If you’re unsure, choose one method to estimate consistently, and then check it against your actual filing approach when you do your return.

If you’re using invoice24, you can keep this step quick: review invoice totals for the period, check what’s outstanding, and keep your income figure current. The goal isn’t perfection; it’s a reliable estimate that gets better each month.

2) Add up your year-to-date expenses

Next, list your business expenses so far. Focus on the categories that materially affect your profit. You don’t need every penny to produce a useful estimate, but you do need the big drivers. Typical categories include:

• Software and subscriptions

• Office supplies and equipment

• Marketing and advertising

• Travel and mileage

• Phone and internet

• Professional fees (accountant, legal)

• Insurance

• Rent or coworking costs

• Training and professional development

If you work from home, you may be able to claim a portion of household costs or a simplified flat rate (depending on your location). If you use your car for business, you may be able to claim mileage or a proportion of running costs. These can significantly impact your profit, so it’s worth including them in your estimate if they apply to you.

3) Project the rest of the year

This is where estimation becomes forecasting. You take what you’ve done so far and make a reasonable prediction about what you’ll do next. There are a few common methods:

Run-rate method: take your average monthly income so far and multiply it by the number of months in the year.

Pipeline method: add confirmed upcoming work (signed contracts, committed projects) and a conservative portion of “likely” work.

Seasonal method: adjust based on your known busy and quiet periods.

For expenses, you can use the same methods. Many expenses are fairly stable month-to-month (subscriptions, phone bills), while others are occasional (equipment purchases). Add expected one-off costs separately so you don’t underestimate your expenses.

4) Estimate annual profit

Once you have projected annual income and projected annual expenses, you can estimate annual profit. This number is the engine of your tax estimate. If your income changes, your profit changes. If your expenses change, your profit changes. Keep profit at the centre of the process.

5) Apply a conservative tax rate to get a planning number

At this stage, you have two choices:

Detailed estimate: apply tax bands, allowances, and contributions as accurately as possible based on your country’s rules.

Rule-of-thumb estimate: apply a conservative percentage (for example, 25–35% of profit) to create a “safe” set-aside figure.

Many sole traders start with a rule-of-thumb rate for set-aside planning and then refine it later as they understand their situation better. The key is to choose a rate that prevents unpleasant surprises. Underestimating is what hurts. Overestimating typically just leaves you with extra cash set aside, which is a much nicer problem to have.

UK-focused considerations: Income Tax, National Insurance, and payments on account

If you’re a UK sole trader, your estimate often needs to account for a few distinct pieces. These can change over time, but the structure remains broadly consistent: Income Tax on your taxable profit plus National Insurance contributions (where applicable), minus any allowances or reliefs you qualify for. Some people also need to account for Student Loan repayments based on income, which effectively behaves like an extra percentage once you pass a threshold.

Another planning factor is that HMRC may ask you to make “payments on account” if your tax bill is above a certain level and you don’t pay enough through PAYE. This can make the first big year feel surprisingly expensive, because you’re paying your current year’s bill and an advance payment toward the next year. It doesn’t necessarily mean you’re paying “more tax overall,” but it can create a cash-flow crunch if you didn’t plan for it.

The practical takeaway is that a UK sole trader often benefits from setting aside a steady percentage of profit all year and building a buffer if payments on account apply. Even if you don’t calculate it down to the pound, being aware of it helps you avoid the classic sole trader shock: “Why is my bill so high this year?”

VAT and sales tax: don’t confuse business taxes with your personal tax bill

Sole traders often handle more than one type of tax. Your personal tax bill is usually linked to your profit. VAT (in the UK and EU) or sales tax (in many other places) is different: it’s typically charged on sales and collected from customers on behalf of the tax authority.

This distinction matters because VAT/sales tax can create cash-flow traps. If you collect VAT on invoices, that money is not “yours” in the long run. It’s better to treat it as a separate pot, especially if you’re new to VAT. If you include VAT receipts in your mental picture of income, you’ll overestimate what you can spend and then struggle when your VAT return is due.

When you estimate your tax bill, be clear whether your income figure includes VAT. Many sole traders prefer to track their “net” income (excluding VAT) for profit and income tax estimates, and track VAT separately as its own obligation. That keeps the planning clean.

A strong invoicing tool helps here. When you invoice properly and keep clear totals, you’re less likely to blend VAT into your profit picture. If invoice24 supports the invoicing approach you need, you can keep invoicing consistent and reduce the chance of VAT confusion when you’re trying to estimate what you owe.

Allowable expenses: the easiest way to reduce your estimated tax bill (legitimately)

One of the biggest reasons sole traders overpay or feel overtaxed is that they don’t claim all allowable expenses. Your tax bill is based on profit, and expenses reduce profit. That doesn’t mean you should spend money just to reduce tax, but it does mean you should capture what you already spend for business.

Commonly missed or underestimated expenses include:

• Part of phone and internet bills used for business

• Home office costs (simplified or actual use)

• Bank charges and payment processing fees

• Professional memberships and subscriptions

• Accounting fees

• Business insurance

• Work-related training that maintains or improves existing skills

• Mileage and travel costs when allowable

• Small tools, equipment, and consumables

Capturing these consistently can materially change your estimated profit and your estimated tax bill. The trick is to build the habit monthly rather than trying to reconstruct it at the end of the year.

Capital allowances and big purchases: what to do with equipment and assets

If you buy equipment like a laptop, camera, machinery, or other assets, you may not treat it the same way as everyday expenses. Some systems allow you to deduct the cost in a specific way (for example, through capital allowances or depreciation rules). The details vary by country.

For estimating, you have two sensible options:

Conservative approach: assume big purchases don’t fully reduce profit immediately (so you don’t underestimate tax), and then adjust once you know the correct treatment.

Informed approach: include the likely deduction based on your local rules or your accountant’s guidance.

If you’re unsure, conservative is safer for cash planning. The worst-case scenario is having extra money set aside. Underestimating can create a painful scramble.

Don’t forget other income: employment, rental, dividends, and side gigs

Your tax bill as a sole trader may not exist in isolation. If you have other income streams—such as a part-time job, rental income, dividends, or another business—your total taxable income might move you into higher tax bands or change how allowances apply. That’s why two sole traders with identical business profits can end up owing different amounts.

For estimation, list your other income sources and decide whether they are taxed separately or combined with your sole trader profit (many systems combine them). Then, when you apply tax rates, treat your sole trader profit as one piece of your total income picture.

If your situation is complex, a simple rule-of-thumb set-aside percentage may not be enough. But even then, you can still create a helpful estimate by keeping your business numbers clean and then working with an accountant or tax software to refine the total.

Payments timing: why your invoice schedule affects your tax stress

Even when your annual profit estimate is accurate, the timing of when cash arrives can cause stress. If clients pay late, you might have a tax bill due before you’ve actually collected all the income you expected. That’s one reason why “invoiced” and “paid” can feel different in real life.

Improving payment discipline can improve tax discipline. If you invoice promptly, follow up on late payments, and maintain visibility on what’s outstanding, your cash flow becomes more predictable—making it easier to set aside tax money.

This is another area where invoice24 can help as part of the workflow. When your invoices are organised and easy to track, you’re less likely to miss income, forget who owes you, or delay chasing late payments. Better collections don’t just improve your bank balance; they improve your ability to pay tax calmly when it’s due.

Choosing a “tax pot” strategy: the easiest way to stay ready

A very practical approach for sole traders is to create a separate savings account (or a dedicated pot) and move money into it regularly. You can do this in a few ways:

Percentage of every payment: whenever you’re paid, transfer a set percentage into the tax pot.

Monthly transfer: at the end of each month, transfer the estimated tax on that month’s profit.

Hybrid: move a percentage of income into the tax pot weekly, then do a monthly reconciliation.

The percentage method is the simplest. The challenge is choosing a percentage that matches your reality. If your expenses are low and your profit margin is high, you’ll need to set aside more. If your expenses are high, you might need less. Many sole traders start with a conservative percentage of profit rather than turnover, but profit is harder to track in real time unless you’re disciplined with expenses.

A workable compromise is to set aside a percentage of turnover that feels safe for your industry and then adjust as your expense picture becomes clearer. The best method is the one you’ll actually stick to.

Example framework: how to estimate with simple numbers

Here’s a simple example to illustrate the logic. Imagine you estimate:

• Annual revenue: £50,000

• Annual allowable expenses: £15,000

• Estimated profit: £35,000

Now you need to estimate the tax and contributions on that £35,000 profit. Without getting bogged down in exact bands and thresholds, you might choose a conservative planning rate—say 25–30% of profit—depending on your circumstances. Using 30% for planning would give:

• Estimated set-aside: £35,000 × 30% = £10,500

That doesn’t mean your final bill will be exactly £10,500. It means you’re building a buffer that’s likely to cover your obligations, and you can refine later when you know the exact numbers. If your final bill is lower, you’ve got extra cash you can reinvest or keep as savings. If your final bill is higher, you’ll be glad you started with a sensible buffer.

Refining your estimate: when to switch from rough to accurate

A rough estimate is excellent for early planning. But as the year progresses—especially in the last quarter—it can be worth refining. You might refine when:

• Your profit jumps because you’ve had an unusually strong month

• You take on a major new client or finish a big project

• You buy expensive equipment

• Your work pattern changes (seasonal shifts, reduced hours, maternity/paternity leave, etc.)

• You register for VAT or change your accounting method

• You receive other income that shifts your overall tax position

Refining doesn’t require a huge spreadsheet. It just means adjusting your projected income and expenses based on what you now know, and then updating the tax pot plan accordingly.

Common mistakes that cause underestimates (and how to avoid them)

Mistake 1: Estimating tax on turnover, not profit. If you ignore expenses, you’ll get a misleading number. Always estimate from profit.

Mistake 2: Forgetting irregular expenses. Annual insurance, equipment upgrades, and professional fees often arrive as lumps. Include them in your forecast.

Mistake 3: Ignoring other income. If your business profit stacks on top of employment income or other sources, your effective rate can rise.

Mistake 4: Confusing VAT with income. Treat VAT/sales tax separately so you don’t spend money that isn’t truly yours.

Mistake 5: Not accounting for payments on account (where relevant). The first year you fall into this system can feel like a double hit. Plan early.

Mistake 6: Waiting until the deadline. Estimating once a year is like checking your fuel gauge only when you’re already on the motorway. A simple monthly review is far easier.

Most of these mistakes disappear when you run a clean admin routine. If your invoices are consistent and your income is visible at a glance, the “estimate” becomes a straightforward monthly habit rather than a stressful calculation. That’s why having a reliable invoicing system like invoice24 is more than convenience—it supports better financial decisions all year.

How to build a monthly routine around invoicing and tax estimating

Here’s a simple monthly routine that many sole traders find sustainable:

Week 1: Issue invoices promptly for completed work. Make sure descriptions are clear and professional.

Week 2: Follow up on any overdue invoices. Late payments create tax stress later.

Week 3: Categorise and total your expenses for the month (even a rough categorisation helps).

Week 4: Update your profit estimate and transfer your tax set-aside to a separate pot.

This routine works best when you reduce friction. If invoicing is quick and tidy, you’re more likely to keep on top of it. invoice24 is built to keep invoicing lightweight, consistent, and accessible, so you can focus on work rather than wrestling with templates and manual tracking.

When you should talk to an accountant (even if you love doing things yourself)

Many sole traders can estimate confidently on their own, especially with straightforward income and expense patterns. However, it’s worth getting professional input if:

• Your profit rises quickly and you’re unsure about higher tax bands

• You have multiple income sources or complex deductions

• You’re considering changing your business structure

• You’re unsure about VAT, cross-border work, or industry-specific rules

• You’re buying expensive assets and want to handle deductions correctly

An accountant doesn’t replace good records; they build on them. If you keep your invoicing organised in invoice24, you make it easier to get help when you need it. Clean invoice records, clear income totals, and consistent documentation reduce the time (and often the cost) of professional support.

Planning for the deadline: turn your estimate into a payment plan

A tax estimate is only useful if it leads to action. The action is building the cash reserve so you can pay without anxiety. Once you have an estimated annual bill, break it down:

• Annual estimate → monthly set-aside → weekly habit

If your estimate is £10,500 for the year, that’s £875 per month. If monthly feels too chunky, that’s about £202 per week. If you’re paid irregularly, you might prefer the “percentage of every payment” method instead.

The goal is to make the tax bill boring—something you’re always ready for. Sole trading is unpredictable enough without adding tax panic on top.

What to do if your estimate changes mid-year

It’s normal for your estimate to move. Maybe you land a great client, raise your prices, take on more projects, or cut back your hours. When your estimate changes, avoid the temptation to ignore it. Instead:

• Update your projected annual revenue and expenses

• Recalculate estimated profit

• Adjust your set-aside rate or monthly transfer

• Consider building a small buffer for safety

Doing this early prevents a last-minute scramble. A small adjustment spread over months is painless compared to a huge bill you didn’t plan for.

Make estimating easier by improving invoicing quality

Tax estimating becomes dramatically simpler when your invoicing is consistent and complete. High-quality invoices aren’t only good for clients—they help you. Clear invoice dates, clear descriptions, consistent numbering, and predictable payment terms all make it easier to understand your income and forecast the year.

invoice24 helps you maintain that consistency. Instead of reinventing your invoice layout every time, you can keep a professional format that supports fast invoicing and reliable income tracking. When your invoicing is easy, you invoice faster. When you invoice faster, you get paid faster. When you get paid faster, setting aside tax becomes easier.

Quick checklist: estimating your sole trader tax bill without stress

Use this checklist as a quick monthly guide:

• Review invoices issued year-to-date (invoice24 makes this simple)

• Confirm what’s been paid and what’s outstanding

• Total your expenses year-to-date (capture the big categories)

• Project income and expenses for the rest of the year

• Estimate annual profit

• Apply a conservative rate to profit for a planning figure

• Move money into a tax pot regularly

• Revisit the estimate when your income pattern changes

Final thoughts: accuracy matters, but consistency matters more

The “perfect” tax estimate is less important than a consistent habit of estimating and setting money aside. Your first goal is to avoid surprises. Your second goal is to make the estimate more accurate over time as your records improve and your understanding grows.

If you want the simplest path to that consistency, start with your invoicing. Clean, organised invoices are the root of reliable income tracking, and reliable income tracking is the root of reliable tax estimates. With invoice24, you can keep your invoicing in one place, maintain a professional workflow, and reduce the admin load that often causes people to avoid tax planning altogether.

In other words: estimate profit, set aside a sensible buffer, and keep your invoicing tidy. Do that, and your tax bill stops being a dreaded surprise and becomes just another planned business expense—handled calmly, on time, and with confidence.