Set aside too little and January becomes a scramble; set aside too much and you have starved your own cash flow all year. The honest answer to "how much should I put aside for tax?" is that it depends on your profit, but you can get to a reliable number in a couple of minutes. This guide gives you the 2026/27 rates, a worked example you can copy, a simple set-aside percentage by profit band, and the one first-year trap that catches almost every new sole trader.
Everything below assumes you are a sole trader in England, Wales or Northern Ireland with no other income. Scottish taxpayers pay different income tax bands (National Insurance is the same UK-wide), and if you also have a salaried job your tax-free allowance may already be used up. If you are not yet registered, start with our guide to registering as self-employed.
How much should a sole trader put aside for tax?
As a rough rule, a sole trader should set aside 20% to 30% of profit for tax and National Insurance. Around 20% covers most people earning under £30,000 of profit, 25% suits £30,000 to £50,000, and 30% or more is safer once profits push into the 40% higher-rate band above £50,270. Profit means income after allowable expenses, not turnover.
The percentage rises with profit because the UK system is progressive: your first £12,570 is tax-free, and higher slices are taxed at higher rates. So the more you earn, the larger the share of the whole that goes to HMRC. Below we turn that rule of thumb into exact figures.
What taxes does a sole trader actually pay?
A sole trader pays two things on business profit: Income Tax and Class 4 National Insurance. Both are worked out on your annual profit through Self Assessment, and both only start above the £12,570 tax-free personal allowance. Class 2 National Insurance is no longer payable if your profits are £7,105 or more. There is no separate "business tax" for a sole trader.
Here are the 2026/27 rates, taken from gov.uk's Income Tax rates and self-employed National Insurance rates pages:
| Band (2026/27) | Profit range | Income Tax | Class 4 NIC |
|---|---|---|---|
| Personal allowance | Up to £12,570 | 0% | 0% |
| Basic rate | £12,571 to £50,270 | 20% | 6% |
| Higher rate | £50,271 to £125,140 | 40% | 2% |
| Additional rate | Over £125,140 | 45% | 2% |
Two points catch people out. First, Class 4 NIC is charged at 6% on profits between £12,570 and £50,270, then drops to just 2% above that, so a basic-rate sole trader pays a combined 26% on that middle slice of profit. Second, the personal allowance means your average (effective) rate is always lower than your top (marginal) rate. For the full mechanics, see how your Self Assessment bill is calculated.
What about Class 2 National Insurance?
For 2026/27, if your profits are at or above the Small Profits Threshold of £7,105, Class 2 contributions are treated as paid and you owe nothing, while still protecting your State Pension record. If your profits are below £7,105, you can choose to pay voluntary Class 2 at £3.65 a week to keep that year qualifying, but it is optional.
How to work out your own figure: a worked example
To find your exact tax, subtract the £12,570 personal allowance from your profit, apply the income tax rate to what is left, then add Class 4 NIC at 6% on the same slice. Take a sole trader with £40,000 of profit in 2026/27 and no other income. Here is the full calculation, step by step.
- Profit: £40,000
- Less personal allowance: £40,000 − £12,570 = £27,430 taxable
- Income Tax (20%): 20% × £27,430 = £5,486
- Class 4 NIC (6%): 6% × £27,430 = £1,645.80
- Class 2 NIC: £0 (profit is above the £7,105 threshold)
- Total due: £5,486 + £1,645.80 = £7,131.80
That £7,131.80 is roughly 17.8% of £40,000. So setting aside 20% of profit would have comfortably covered the bill, with a little spare. You can check your own number in seconds with our self-employed tax calculator.
How much to set aside by profit level
The effective rate, the share of your total profit that actually goes to HMRC, climbs steadily as profit rises. The table below shows the combined Income Tax and Class 4 NIC for a 2026/27 sole trader with no other income, and a safe set-aside percentage to bank as you earn.
| Annual profit | Income Tax + Class 4 NIC | Effective rate | Suggested set-aside |
|---|---|---|---|
| £20,000 | £1,931.80 | ~10% | 15% |
| £30,000 | £4,531.80 | ~15% | 20% |
| £40,000 | £7,131.80 | ~18% | 25% |
| £50,000 | £9,731.80 | ~19% | 25% |
| £60,000 | £13,888.60 | ~23% | 30% |
A simple rule of thumb
If you want one number to run with: put aside 25% of every payment you receive once you are trading steadily. That over-covers a basic-rate sole trader and builds a buffer for the higher-rate band if you have a good year. Only drop to 20% if your profit is reliably under £30,000, and lift to 30% or more if you are consistently over £50,270.
Why your first January bill is bigger: payments on account
In your first year you will usually pay more than the tax on that year alone, because of payments on account. If your Self Assessment bill is over £1,000 and less than 80% of your tax was collected at source, HMRC adds two advance instalments towards next year's bill, each worth half of this year's tax, due 31 January and 31 July.
Using the £40,000 example, the first 31 January payment is not £7,131.80 but £7,131.80 plus a £3,565.90 first instalment = £10,697.70, followed by another £3,565.90 the next 31 July. That is why a first tax bill can feel almost 50% higher than expected. We explain the mechanics in why your first tax bill feels so high, and gov.uk covers the rules under payments on account. In year one, aim closer to 27% to 30% set aside so the January double-hit does not sting.
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A practical system: open a separate tax pot
The cleanest way to never miss a tax bill is to move your set-aside percentage into a separate savings account every time you get paid, not at year end. Treat the tax money as never yours: it is HMRC's, sitting in your account. A pot that earns interest also means the tax you owe quietly earns for you until the deadline.
Do it per payment, not per month, so the pot always matches what you have actually earned. When the bill arrives you pay from the pot and keep the interest. Our guide to how to pay your Self Assessment bill covers every payment method and how long each takes to clear.
What if my income is irregular?
Irregular income is exactly why a fixed percentage works so well: a flat 25% of each payment self-adjusts to good and bad months automatically. If you have a bumper year that tips you into the higher-rate band, top the pot up to 30%. If cash is genuinely too tight to pay a bill you have filed, do not ignore it: set up a HMRC Time to Pay arrangement before penalties start to build.
Common mistakes sole traders make with tax money
Most tax-time stress traces back to a handful of avoidable errors: setting aside on turnover instead of profit, forgetting payments on account, or spending the pot in a lean month. Knowing these in advance is half the fix.
- Saving from turnover, not profit. You are taxed on profit after allowable expenses. Setting aside a percentage of sales overshoots, but setting aside nothing for expenses you have not yet paid can undershoot. Base it on realistic profit.
- Ignoring the first-year payment on account. The single biggest shock. Budget for the extra 50% in your first January.
- Dipping into the tax pot. Once you borrow from it "just this once", the discipline is gone. Keep it in a separate account you do not touch.
- Forgetting you may still owe tax on a side income. If your sole trader work sits alongside a job, your personal allowance is likely used up already, so a higher share of your profit is taxable. Check whether you even need to file with our explainer on whether you need to do a Self Assessment.
Sources
- gov.uk, Income Tax rates and Personal Allowances
- gov.uk, Self-employed National Insurance rates
- gov.uk, Payments on account
- gov.uk, Register for Self Assessment
Frequently asked questions
How much should a sole trader put aside for tax?
Set aside 20% to 30% of profit for Income Tax and Class 4 National Insurance. Around 20% covers most sole traders earning under £30,000 of profit, 25% suits £30,000 to £50,000, and 30% or more is safer above £50,270 where the 40% higher rate begins. A flat 25% of each payment is a safe default for most.
Do sole traders pay National Insurance as well as Income Tax?
Yes. Sole traders pay Class 4 National Insurance at 6% on profits between £12,570 and £50,270 for 2026/27, then 2% above £50,270, on top of Income Tax. Class 2 National Insurance is treated as paid at no cost if your profits are £7,105 or more, so most sole traders owe no separate Class 2.
Should I set aside tax on turnover or on profit?
On profit, which is your income after allowable business expenses. You are only taxed on profit, so saving a percentage of turnover usually puts aside far too much. Estimate your realistic profit margin and apply your set-aside percentage to that, adjusting as your actual figures firm up through the year.
Why is my first Self Assessment bill so much higher than expected?
Because of payments on account. If your tax bill is over £1,000, HMRC asks for two advance instalments towards next year, each half of this year's bill, due 31 January and 31 July. So your first January payment can be around 50% higher than the tax for that year alone. Budget for it in year one.
Where should I keep the money I set aside for tax?
In a separate savings account, moved across every time you get paid rather than at year end. Keeping it apart stops you spending it, and an interest-paying pot means the tax you owe earns for you until the deadline. Pay the bill from the pot and keep the interest.
