How Much Should You Set Aside for Tax? A Sole Trader's Cheat Sheet

One of the most stressful things about being a newly self-employed sole trader is not knowing how much tax you will owe at the end of the year. Unlike employment, where tax is deducted before you see your pay, sole traders receive their full income and must set money aside themselves. Get it wrong and you face a nasty surprise in January.

This guide breaks down the exact tax rates you need to know, gives you practical rules of thumb, and shows you how to build a simple monthly savings plan so your tax bill never catches you off guard.

The Taxes You Owe as a Sole Trader

As a sole trader, you pay three types of tax on your business profits:

1. Income Tax — the main tax on your earnings
2. Class 2 National Insurance — a flat-rate weekly contribution
3. Class 4 National Insurance — a percentage-based contribution on your profits

All three are calculated on your taxable profit — that is, your total business income minus your allowable business expenses. Let us look at each one for the 2025/26 tax year (6 April 2025 to 5 April 2026).

Income Tax Rates 2025/26

Income Tax is calculated on your total taxable income from all sources (self-employment, employment, pensions, savings, property, etc.) after deducting your Personal Allowance.

Band	Taxable income	Rate
Personal Allowance	Up to £12,570	0%
Basic rate	£12,571 to £50,270	20%
Higher rate	£50,271 to £125,140	40%
Additional rate	Over £125,140	45%

The Personal Allowance of £12,570 means you pay no Income Tax on the first £12,570 of your total income. It starts to reduce if your income exceeds £100,000, decreasing by £1 for every £2 over £100,000. At £125,140, your Personal Allowance is zero.

Key point: If you have a day job as well as your sole trader business, your Personal Allowance is likely already used up by your employment income. In that case, your self-employment profit may be taxed at your marginal rate from the first pound.

National Insurance Rates 2025/26

Class 2 National Insurance

Class 2 NI is a flat-rate contribution of £3.45 per week (approximately £179.40 per year). You pay this if your profits exceed the Small Profits Threshold of £6,725 per year. Class 2 contributions count towards your State Pension entitlement, so most sole traders benefit from paying them.

Class 4 National Insurance

Class 4 NI is calculated as a percentage of your annual profits:

Profit band	Rate
Up to £12,570	0%
£12,571 to £50,270	6%
Over £50,270	2%

Class 4 NI is collected through your Self Assessment tax return alongside your Income Tax.

Calculating Your Total Tax: A Worked Example

Let us say your sole trader profit for 2025/26 is £35,000 (after deducting expenses) and you have no other income.

Income Tax

• First £12,570: £0 (covered by Personal Allowance)
• Remaining £22,430 (£35,000 - £12,570) at 20%: £4,486

Class 2 National Insurance

• £3.45 x 52 weeks: £179.40

Class 4 National Insurance

• Profits between £12,570 and £35,000 = £22,430 at 6%: £1,345.80

Total Tax Bill

Tax	Amount
Income Tax	£4,486.00
Class 2 NI	£179.40
Class 4 NI	£1,345.80
Total	£6,011.20

On a profit of £35,000, that is an effective tax rate of roughly 17.2%. But remember, if this is your first year, payments on account will add another 50% on top — making your January bill around £9,017.

The Rules of Thumb

You do not need to calculate your exact tax every month. Instead, use these simple guidelines to set aside the right amount:

If Your Profit Is Under £50,270 (Basic Rate)

Set aside 25% to 30% of your profit each month. This covers Income Tax at 20%, Class 4 NI at 6%, and gives you a buffer for payments on account.

• 25% is the minimum — suitable if you are confident about your expense claims and have no other income using up your Personal Allowance
• 30% is safer — recommended if you have other income sources or want a comfortable margin

If Your Profit Is Between £50,270 and £125,140 (Higher Rate)

Set aside 35% to 40% of your profit. Once you cross the higher rate threshold, the combined Income Tax (40%) and Class 4 NI (2%) rate is 42% on each additional pound earned.

If You Also Have Employment Income

If your day job income already exceeds your Personal Allowance, your self-employment profit is taxed from the first pound at your marginal rate. In this case:

• Basic rate taxpayer with a side hustle: set aside 30% of self-employment profit
• Higher rate taxpayer with a side hustle: set aside 40% to 45% of self-employment profit

Building a Monthly Savings Plan

Here is a practical system to make sure the money is there when HMRC comes calling:

Step 1: Open a Separate Savings Account

Open a savings account that you treat as untouchable. Several business-focused banks make this easy. Starling Bank lets you create “Spaces,” Tide has tax pots, and Monzo offers savings pots. The key is that this money is ring-fenced and not mixed with your day-to-day spending.

Step 2: Calculate Your Monthly Set-Aside

Take your expected monthly profit (income minus expenses) and multiply by your chosen percentage. For example:

• Monthly income: £4,000
• Monthly expenses: £500
• Monthly profit: £3,500
• Set-aside at 30%: £1,050 per month

Step 3: Transfer on Invoice Day

Each time you receive a payment, immediately transfer the relevant percentage into your tax savings account. Do not wait until the end of the month. The money is not yours to spend — it belongs to HMRC.

Step 4: Review Quarterly

Every three months, review your actual income and expenses against your estimates. Adjust your set-aside percentage if needed. With MTD for Income Tax arriving from April 2026, you will be submitting quarterly updates to HMRC anyway, making this a natural checkpoint.

Step 5: Reconcile After Filing

Once you file your Self Assessment return and know your exact liability, compare it to what you have saved. If you have more than enough, consider keeping the surplus as a buffer for next year. If you are short, you have time to make up the difference before the 31 January deadline.

What If Your Income Is Irregular?

Many sole traders do not earn a consistent amount each month. Freelancers may have feast-or-famine cycles. Seasonal businesses may earn most of their income in a few months.

The percentage method still works. Whether you earn £8,000 in one month and £1,000 the next, setting aside the same percentage of each payment means your savings scale automatically with your income. The key is consistency — transfer the money before you have a chance to spend it.

If your income is highly variable, lean towards the higher end of the range (30% for basic rate, 40% for higher rate). It is far better to have a small surplus at the end of the year than a shortfall.

What to Do If You Cannot Pay Your Tax Bill

If January arrives and you do not have enough money to pay your tax bill, do not panic and do not ignore it. HMRC offers several options:

Time to Pay Arrangement

You can set up a Time to Pay plan to spread your tax bill over up to 12 monthly instalments. If your debt is under £30,000 and you are within 60 days of the payment deadline, you can set this up online without speaking to anyone. Interest will be charged on the outstanding balance at HMRC’s prevailing rate, but you will avoid the harsher late payment penalties.

Budget Payment Plan

HMRC also offers a Budget Payment Plan that lets you make regular advance payments towards your next tax bill throughout the year. This is essentially a voluntary version of payments on account, where you choose how much to pay and when. You can set up weekly or monthly direct debits through your HMRC online account.

What Not to Do

• Do not ignore the bill. HMRC penalties and interest accrue quickly, and persistent non-payment can lead to debt collection proceedings.
• Do not borrow on a high-interest credit card to pay HMRC. The interest rate on a Time to Pay arrangement is almost certainly lower.
• Do not reduce your payments on account to zero unless your income has genuinely dropped to nothing. Under-estimating leads to a larger balancing payment plus interest.

Quick Reference: How Much to Save

Your situation	Set aside from each invoice
Basic rate, sole trader only	25%–30%
Basic rate, also employed	30%
Higher rate, sole trader only	35%–40%
Higher rate, also employed	40%–45%
First year (to cover payments on account)	Add 5% to the above

These percentages are deliberately conservative. It is always better to over-save and have a small refund than to under-save and scramble for cash in January.

The Bottom Line

The simplest advice for any sole trader is this: every time money comes in, move a percentage straight into a tax savings account before you do anything else. Whether that percentage is 25% or 40% depends on your income level, but the habit is the same.

Tax does not have to be stressful. It becomes stressful when people treat it as a future problem rather than a present reality. By setting money aside from day one, you turn your tax bill from a January shock into a simple administrative task.

This article was last updated on 12 February 2026. Tax rates quoted are for the 2025/26 tax year. Rates may change — always check GOV.UK for the latest figures or consult a qualified tax adviser.