Quarterly Tax Planning for Freelancers

Why Plan Quarterly

The biggest financial mistake freelancers make is treating tax as a January problem. By the time your Self Assessment deadline arrives, the tax has been accruing for months — and if you haven't planned, the bill can be devastating.

Quarterly tax planning solves this by spreading the mental and financial burden throughout the year. Instead of one large annual shock, you maintain awareness of your tax position and build reserves progressively.

Benefits of quarterly planning:

• No surprises: You always know roughly what you'll owe
• Better cash flow: Setting aside tax monthly or quarterly prevents spending money you'll need later
• Time to adjust: If taxes are higher than expected, you can adjust spending or increase income
• Strategic decisions: You can time large expenses (capital purchases, pension contributions) optimally
• Less stress: January becomes a simple formality, not a crisis

Quarterly reviews align naturally with VAT return cycles if you're VAT registered, Making Tax Digital requirements (coming for Income Tax), and business quarters. Even if you're not required to report quarterly, adopting this rhythm creates financial discipline.

How Much to Set Aside

The classic rule of thumb for freelancer tax reserves is 25-30% of profit. This covers Income Tax and National Insurance for most freelancers. Here's how to refine this estimate:

Understanding UK tax bands (2025/26):

• Personal Allowance: £12,570 (no tax)
• Basic rate: 20% on income £12,571 to £50,270
• Higher rate: 40% on income £50,271 to £125,140
• Additional rate: 45% on income over £125,140

National Insurance (Class 4 for self-employed):

• 6% on profits between £12,570 and £50,270
• 2% on profits above £50,270

Note: Class 2 NI was abolished in April 2024. NI credits are now automatic if profits exceed £6,725.

Calculating your effective rate:
Combine Income Tax and NI to find your marginal rate:

• Below £12,570: 0%
• £12,570-£50,270: 20% + 6% = 26%
• £50,270-£125,140: 40% + 2% = 42%
• Above £125,140: 45% + 2% = 47%

General guidelines:

• Profit under £30,000: Set aside 20-25%
• Profit £30,000-£50,000: Set aside 25-28%
• Profit £50,000-£100,000: Set aside 30-35%
• Profit over £100,000: Set aside 35-40% (Personal Allowance tapers above £100k)

Setting Up a Tax Reserve Account

A separate tax reserve account is the simplest way to ensure you have funds when the bill arrives. Here's how to implement it:

Choose an account:
Open a separate savings account at your bank. Many banks offer instant-access savings accounts with reasonable interest rates. The account should be:

• Easy to transfer money into (automate if possible)
• Accessible when you need to pay HMRC
• Interest-bearing (why not earn while you save?)
• Clearly labelled (so you don't confuse it with operating funds)

Automation approach:
Set up a standing order or automatic transfer. Options include:

• Fixed percentage of each payment received
• Fixed amount weekly or monthly
• Manual transfer each time you're paid

The "percentage of each payment" approach is most accurate but requires discipline. Many freelancers prefer a monthly fixed amount based on estimated annual income, adjusted quarterly.

Don't touch the reserve:
The tax reserve is not emergency funds. It's money that already belongs to HMRC — you're just holding it temporarily. Resist the temptation to "borrow" from this account for business expenses.

Quarterly Review Checklist

At the end of each quarter (or monthly if you prefer), work through this checklist:

Income review:

• ☐ Total income received this quarter
• ☐ Year-to-date income total
• ☐ Projected full-year income (current pace)
• ☐ Compare to same quarter last year
• ☐ Outstanding invoices (future income)

Expenses review:

• ☐ Categorise all expenses
• ☐ Identify any missing receipts
• ☐ Calculate year-to-date expenses
• ☐ Projected full-year expenses
• ☐ Any large planned purchases ahead?

Profit and tax estimate:

• ☐ Calculate year-to-date profit (income - expenses)
• ☐ Project full-year profit
• ☐ Estimate tax due (using rates above)
• ☐ Compare to tax reserve balance
• ☐ Adjust monthly savings if needed

Action items:

• ☐ Top up tax reserve if behind target
• ☐ Review any tax-saving opportunities
• ☐ Consider pension contributions
• ☐ Note any upcoming large expenses

Avoiding Payment on Account Surprises

Payment on Account (POA) catches many freelancers off-guard. Understanding how it works prevents nasty surprises.

How POA works:
If your Self Assessment bill exceeds £1,000 (and less than 80% was collected via PAYE), HMRC requires advance payments towards next year's tax. These are 50% of your current year's bill, paid in two instalments.

The POA timeline:

• 31 January: Pay current year tax + first POA (50%)
• 31 July: Second POA (50%)
• Following 31 January: Balancing payment (or refund if income was lower)

First-year freelancer impact:
Your first Self Assessment as a freelancer is particularly painful. You pay the full year's tax PLUS an additional 50% as first POA. If your tax bill is £10,000, you'll pay £15,000 in January.

Reducing POA:
If you expect next year's income to be lower, you can apply to reduce your Payments on Account. Do this through your Government Gateway account. However, if your estimate is wrong and you underpay, HMRC charges interest.

Tools for Tracking

The right tools make quarterly planning efficient rather than onerous.

Accounting software:
Dedicated accounting software automates most quarterly calculations:

• FreeAgent: Popular with freelancers; estimates tax in real-time
• Xero: Powerful reporting; excellent bank integration
• QuickBooks Self-Employed: Simple interface; automatic mileage tracking
• Wave: Free; good for simple freelance businesses

Most accounting software connects to your bank account, categorises transactions, and generates profit reports. Some estimate your tax liability automatically.

Spreadsheets:
If you prefer manual tracking, create a spreadsheet with:

• Monthly income total (from bank statements)
• Monthly expenses by category
• Running profit calculation
• Tax estimate formula
• Tax reserve tracking

Receipt capture apps:
Apps like Expensify, Receipt Bank (now Dext), or your accounting software's mobile app let you photograph receipts immediately. This prevents the end-of-year scramble for missing documentation.

Calendar reminders:
Set recurring calendar reminders for:

• Monthly: Reconcile bank statement, transfer to tax reserve
• Quarterly: Full quarterly review
• 31 January and 31 July: Tax payment deadlines
• End of tax year (5 April): Year-end wrap-up

Quarterly tax planning transforms tax from an annual crisis into a manageable routine. Start with a simple system — even just the tax reserve account — and build from there. The peace of mind is worth the small additional effort.