How Much Tax Should I Set Aside? (A Guide for the Self-Employed)
It's the question every sole trader asks, usually in the second half of January. When you're employed, tax disappears before your pay arrives. When you're self-employed, every penny lands in your account - and some of it was never yours to spend.
The short answer is 25-30% of your profit if you're a basic-rate taxpayer, and more once you earn above £50,270. But the reason that figure looks high, and why it's still right, is the part worth understanding. This guide explains both, with real numbers and a simple system you can actually stick to.
It's part of our sole trader series of simple explainers, and sits beneath our main Sole Trader Tax Guide.
📋 Table of Contents
⚡ The Short Answer
As a rule of thumb, set aside this much of your profit:
Your annual profit | Set aside |
Up to £50,270 | 25-30% |
£50,270 to £100,000 | 30-35% |
Over £100,000 | 40%+ |
These are deliberately a little higher than the tax you'll actually pay, for two reasons: payments on account (which can make your first bill 50% bigger than expected) and headroom if your profit grows. Setting aside too much is a pleasant surprise in January. Too little is a debt to HMRC.
🧾 Why It's Two Taxes, Not One
The most common reason people come up short is budgeting only for income tax. As a sole trader you pay two charges on your profit, both through Self-Assessment:
Income Tax - 20% between £12,571 and £50,270, 40% up to £125,140, and 45% above that
Class 4 National Insurance - 6% between £12,570 and £50,270, then 2% above
Together that's 26p in every pound of profit in the basic-rate band - not the 20p most people assume. And remember it's profit, not turnover: allowable expenses come off first, which is why claiming everything you're entitled to matters. Our guide to what expenses sole traders can claim covers the ones most often missed.
📊 How Much Tax You'll Pay at Each Profit Level
Here's the actual income tax and Class 4 NI bill for a sole trader with no other income in 2026/27:
Profit | Income tax | Class 4 NI | Total bill | Share of profit |
£20,000 | £1,486 | £446 | £1,932 | 9.7% |
£30,000 | £3,486 | £1,046 | £4,532 | 15.1% |
£40,000 | £5,486 | £1,646 | £7,132 | 17.8% |
£50,000 | £7,486 | £2,246 | £9,732 | 19.5% |
£60,000 | £11,432 | £2,457 | £13,889 | 23.1% |
£80,000 | £19,432 | £2,857 | £22,289 | 27.9% |
£100,000 | £27,432 | £3,257 | £30,689 | 30.7% |
£120,000 | £39,432 | £3,657 | £43,089 | 35.9% |
You'll notice the actual share is lower than the set-aside percentages above. That gap is deliberate - and the next two sections explain why you need it.
📈 What to Set Aside From Each Extra Pound
Your average rate tells you what your total bill looks like. Your marginal rate tells you how much of each extra pound to put aside - which is the more useful number when a big job comes in:
£12,570 to £50,270 - put aside 26p in every extra pound
£50,270 to £100,000 - 42p
£100,000 to £125,140 - 62p. Your personal allowance is withdrawn by £1 for every £2 over £100,000, creating an effective 60% income tax rate in this band, plus 2% NI
Over £125,140 - 47p
That £100,000-£125,140 band surprises a lot of people. If you're heading towards it, it's worth talking to us before the year end - pension contributions can be particularly effective here.
⚠️ The First-Year Trap: Payments on Account
This is the part nobody warns you about, and it's why the rule of thumb is 25-30% rather than 18%.
If your tax bill is over £1,000, HMRC asks you to pay towards next year's bill in advance, in two instalments: one on 31 January and one on 31 July. Each is half of your previous year's bill.
In your first year, that means on 31 January you pay:
Your full bill for the year just ended, plus
The first payment on account for the current year - another 50% on top
So your first January payment is roughly 150% of what you'd expect. After that, things even out: as long as your profit is steady, the payments on account roughly cover each year's bill and January becomes much less dramatic. Our explainer on payments on account covers how they work in full.
🧮 Worked Example: Marcus's First January
Marcus starts out as a self-employed plumber. In his first full tax year, 2026/27, he makes £36,000 profit after expenses.
Income tax: 20% on £23,430 = £4,686
Class 4 NI: 6% on £23,430 = £1,405.80
Total bill: £6,091.80 - about 17% of his profit
On 31 January 2028, Marcus pays:
His 2026/27 bill: £6,091.80
First payment on account for 2027/28: £3,045.90
Total: £9,137.70
Then another £3,045.90 on 31 July 2028.
If Marcus had set aside 17% - his "real" tax rate - he'd have had £6,120 saved and been more than £3,000 short in January. Had he set aside 25%, he'd have had £9,000, almost exactly what he needed. That's the 25% rule doing its job.
🗂️ Other Things to Put Aside For
Tax and NI aren't the only things that can come out of the same pot:
VAT. If you're VAT registered, the VAT you charge customers isn't yours. On a VAT-inclusive payment at the standard rate, one-sixth belongs to HMRC. Keep it entirely separate from your income tax savings - our guide to VAT for sole traders explains why.
Student loan repayments. If you have a student loan, repayments on your self-employed income are collected through Self Assessment alongside your tax, so they need to be in the pot too.
Other income. If you're also employed, your salary uses up some or all of your personal allowance and basic-rate band, so more of your self-employed profit is taxed at higher rates. Set aside more than the table suggests.
🏦 A Simple System That Works
Knowing the percentage is half of it. The other half is actually moving the money before you spend it:
Open a separate savings account just for tax. An easy-access account means it earns interest while it waits.
Move a fixed percentage of every payment the day it arrives - not monthly, not "when you get round to it". Because you're paid turnover rather than profit, a figure of 20-25% of each invoice works for most basic-rate sole traders with typical expenses.
Review it every quarter. Compare what's in the pot with what your profit so far suggests you'll owe, and top up or relax accordingly.
Don't touch it. It isn't a buffer for a quiet month. It's HMRC's money you're holding.
If you're within Making Tax Digital, you're already reporting to HMRC quarterly - so your quarterly update is a natural moment to check your tax pot too. Our MTD for ITSA guide covers the thresholds.
✂️ Reducing What You Owe, Legitimately
The best way to need less in the pot is to owe less in the first place:
Claim every allowable expense. Each £100 of legitimate costs saves a basic-rate sole trader £26.
Pay into a pension. Personal pension contributions get tax relief at your marginal rate, and are especially powerful in the higher-rate band and the £100,000-£125,140 trap.
Keep good records through the year, not in a January panic. Expenses you can't evidence are expenses you can't claim. Solid bookkeeping pays for itself.
⚠️ Common Mistakes to Avoid
Budgeting for income tax only. Class 4 NI adds another 6% on most profit.
Saving a percentage of profit at year end. By then the money's often spent. Save from every payment as it comes in.
Forgetting payments on account. The first January bill is usually around 150% of the actual tax.
Mixing VAT with your tax savings. VAT is due quarterly and isn't yours at all.
Ignoring other income. A salary pushes more of your profit into higher bands.
Dipping into the pot. If it's there, it's spoken for.
💬 Frequently Asked Questions
What percentage should a sole trader save for tax? For most basic-rate sole traders, 25-30% of profit. That covers income tax, Class 4 NI and the first-year payment on account, with some headroom.
Should I save a percentage of turnover or profit? Tax is charged on profit, but you're paid turnover, so it's easiest to save a percentage of every payment. Around 20-25% of each invoice works for most basic-rate sole traders with typical expenses.
Why is my first tax bill so big? Because of payments on account. In your first January you pay your full bill plus half of next year's in advance, so it's about 150% of what you'd expect.
What happens if I can't pay in full? Contact HMRC about a Time to Pay arrangement as early as possible. Interest and late-payment penalties apply to unpaid tax, so leaving it makes things worse. Our guide to Self-Assessment deadlines and late penalties explains the charges.
Can I reduce my payments on account? Yes, if you expect your profit to fall, you can apply to reduce them. But if you reduce them too far and your profit doesn't fall, you'll pay interest on the shortfall.
Do I pay less tax in my first year of trading? Not usually less tax - but the cash timing is harder, because of payments on account landing on top of your first bill.
💡 Key Takeaways
Set aside 25-30% of profit in the basic-rate band, more as you earn more.
You pay two taxes on profit: income tax and Class 4 National Insurance - 26p per pound in the basic-rate band.
Payments on account make your first January bill around 150% of your actual tax.
Watch the £100,000-£125,140 band, where each extra pound costs 62p.
Keep VAT in a separate pot - it was never your money.
Save a fixed share of every payment, into a separate account, and review it quarterly.
🧮 Tax Set-Aside Calculator
Want a quick figure for your own situation? Use our tax set-aside calculator - enter your expected profit and see how much to put aside, including your first-year payment on account.
📞 Want a Number You Can Rely On?
At ASBA Accounting, we work with sole traders across Crawley and West Sussex to forecast what they'll owe well before the deadline - so January is a non-event rather than a shock. We'll prepare your tax return, check your payments on account are set at the right level, and help you claim everything you're entitled to.
👉 Get in touch today or call us on 01293 525656 for friendly, straightforward advice.
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