How Much Should I Set Aside for Tax Each Month?

The Question That Keeps Sole Traders Awake

If there's one financial question that haunts self-employed people more than any other, it's this: "Am I saving enough for my tax bill?" The fear of an unexpected January bill — one that wipes out your savings or forces you into a payment plan with HMRC — is real and widespread. According to HMRC data, thousands of sole traders miss their self-assessment payment deadline each year, and the most common reason cited is not having the funds available.

The solution is straightforward in principle: set aside a portion of your income throughout the year so the money is there when HMRC asks for it. But knowing how much to set aside is where it gets complicated, because the right percentage depends on your total annual income, your allowable expenses, your other income sources, and whether you're making payments on account.

This guide gives you practical percentages to use at every income level, explains the payment on account system, and shows you how to build a tax savings habit that eliminates January surprises.

The Simple Rule of Thumb (And Why It's Not Enough)

The most commonly cited rule of thumb is "set aside 30% of your income for tax." Research from the Federation of Small Businesses shows that managing cash flow and tax obligations is one of the biggest challenges for sole traders. The 30% figure is a reasonable starting point for a sole trader with moderate income and few expenses, but it's not universally accurate. Depending on your circumstances, 30% could be too much (meaning cash is unnecessarily locked away) or too little (meaning a nasty shortfall).

Here's why the one-size-fits-all approach fails:

Income level matters. A sole trader earning £20,000 profit pays an effective tax rate of about 10%. One earning £80,000 pays closer to 27%. Setting aside 30% in both cases means the first person is over-saving by a significant margin, while the second is under-saving.

Expenses matter. You pay tax on profit, not turnover. If your turnover is £50,000 but your allowable expenses are £15,000, your taxable profit is £35,000. Setting aside 30% of turnover would mean saving £15,000, but your actual tax bill would be approximately £6,300 — you'd be over-saving by £8,700.

Other income matters. If you have employment income that uses up part of your personal allowance and basic rate band, your self-employment income is taxed at a higher effective rate.

Recommended Percentages by Profit Level

Based on the 2025/26 tax rates, here are more precise percentages to set aside, calculated on your profit (turnover minus expenses), assuming self-employment is your only income source:

| Annual Profit | Set Aside (% of profit) | Approximate Annual Tax Bill | |---|---|---| | £12,570 or below | 0% | £0 (below personal allowance) | | £15,000 | 8% | £1,200 | | £20,000 | 11% | £2,200 | | £25,000 | 14% | £3,400 | | £30,000 | 16% | £4,700 | | £35,000 | 17% | £6,100 | | £40,000 | 18% | £7,300 | | £50,000 | 20% | £9,900 | | £60,000 | 24% | £14,100 | | £70,000 | 26% | £18,300 | | £80,000 | 27% | £21,700 | | £90,000 | 28% | £25,200 | | £100,000 | 31% | £30,900 |

These figures include income tax, Class 2 NI, and Class 4 NI. They assume no other income sources and standard personal allowance.

Notice how the percentage rises steeply above £50,000 as higher-rate tax kicks in, and again above £100,000 when the personal allowance begins to taper.

The Payments on Account Trap

Payments on account are advance payments towards your next year's tax bill. HMRC requires them if your self-assessment tax bill exceeds £1,000 (after deducting tax paid at source). Each payment on account is 50% of the previous year's tax bill.

The key dates:

• 31 January: Balance of current year's tax + first payment on account for next year
• 31 July: Second payment on account for next year

The trap: In your first year of self-assessment (or the first year your bill exceeds £1,000), the January deadline brings a triple hit: the full year's tax bill plus 50% advance payment for next year. Effectively, you pay 150% of one year's tax in a single month.

Example: Your 2024/25 tax bill is £6,000. On 31 January 2026, you pay £6,000 (the balance) plus £3,000 (first payment on account for 2025/26) = £9,000. On 31 July 2026, you pay another £3,000 (second payment on account). Then on 31 January 2027, you pay the balance of 2025/26 tax less the £6,000 already paid, plus a new first payment on account for 2026/27.

To account for payments on account, add approximately 50% to your first year's set-aside amount. After the first year, the system smooths out, but you need to be aware of the cash flow pattern.

Our guide to paying your self-assessment bill covers the payment mechanics in detail.

A Practical System for Setting Aside Tax

Knowing the right percentage is only useful if you actually save the money. Here's a system that works:

Step 1: Open a Separate Savings Account

This is non-negotiable. If your tax money sits in your current account alongside your operating funds, you'll spend it. A separate account — even a basic instant-access savings account — creates a psychological and practical barrier. Some banks offer labelled pots or sub-accounts that serve the same purpose.

Step 2: Transfer After Every Invoice

Each time you receive payment for an invoice, immediately transfer the appropriate percentage to your tax savings account. Don't wait until the end of the month — do it within 24 hours of receiving the payment.

If your annual profit is around £40,000 and you have relatively low expenses, transferring 25% of each invoice payment (to allow a margin of safety) is a reasonable approach.

Step 3: Adjust Quarterly

Every three months, review your year-to-date income and expenses and adjust your percentage if needed. If you've had a stronger quarter than expected, you might need to increase the percentage. If expenses have been higher than anticipated, you might be able to reduce it.

Step 4: Never Raid the Tax Account

Treat your tax savings account as untouchable. It's not an emergency fund, it's not a buffer for slow months, and it's not available for business investments. It belongs to HMRC — you're just holding it for them.

How Penny Handles This for You

If the idea of calculating percentages and adjusting quarterly sounds like more work than you want, this is one of the things I do best.

When you use Accounted, I maintain a running estimate of your tax liability based on your actual year-to-date figures — not projections or averages, but real income and real expenses. After each invoice payment clears, I tell you exactly how much to set aside based on where your income currently sits relative to the tax bands.

Early in the tax year, when there's more uncertainty, I err on the side of caution. As the year progresses and your actual profit becomes clearer, my recommendations become increasingly precise. By December, I can usually tell you your expected tax bill within a few per cent of the final figure.

This dynamic approach is far more accurate than a fixed percentage because it accounts for the reality that self-employment income is rarely evenly distributed throughout the year. A freelance consultant who earns 60% of their income in the first half of the year needs a different savings pattern than a wedding photographer who earns most of their income between May and September.

Explore how this works on our features page.

VAT Set-Asides

If you're VAT-registered, you need to set aside VAT as well as income tax and National Insurance. VAT is conceptually simpler — you charge VAT on sales and pay it to HMRC, offset by the VAT you reclaim on purchases — but it still requires cash flow management.

A common mistake is treating VAT collected from customers as income. It's not — it's money you're holding on behalf of HMRC. Set it aside immediately, just as you do with income tax savings.

If you're on the flat rate scheme, the set-aside calculation is straightforward: transfer the flat rate percentage of your gross (VAT-inclusive) sales to your tax savings account after each invoice. If you're on standard VAT accounting, the calculation is more complex because you need to account for input VAT recovery.

Our guide on VAT voluntary registration covers the cash flow implications of different VAT schemes.

What If You've Already Fallen Behind?

If you're reading this in November or December and haven't been setting aside tax all year, don't panic — but do act now.

Calculate your approximate liability. Use the percentage table above to estimate what you owe based on your year-to-date profit. Our post on how much tax you'll pay as a sole trader provides detailed calculations at every income level.

Save what you can immediately. Even partial savings reduce the shortfall.

Consider a Time to Pay arrangement. If you can't pay your full tax bill by the deadline, HMRC offers Time to Pay arrangements that allow you to spread payments over up to 12 months. You'll pay interest, but you won't face the more severe penalties for non-payment. Contact HMRC before the deadline to arrange this — don't wait until after you've missed the payment.

Start the system from now. Whatever your current shortfall, beginning the set-aside habit today prevents the same problem next year.

According to guidance from HMRC on payment difficulties, proactively contacting them about payment problems is always better than ignoring the issue.

Building the Habit

The key insight about tax savings is that it's not primarily a mathematical problem — it's a behavioural one. Most sole traders can calculate a reasonable set-aside percentage. The challenge is consistently transferring the money, month after month, even when cash flow is tight and temptation beckons.

That's why automating the process — whether through a standing order, a banking app rule, or by letting me calculate and remind you after each invoice — makes such a difference. When saving for tax becomes automatic, the stress disappears.

Sign up for Accounted and let me take the guesswork out of your tax savings. You'll always know exactly where you stand.

Penny, your AI bookkeeper, tracks your tax position in real time and flags opportunities to reduce your bill. Meet Penny →