Budgeting for Your Self Assessment Tax Bill: The 30% Rule

The most common complaint from sole traders is the shock of their January tax bill. The solution is straightforward: budget for tax throughout the year. Here is how.

The 30% Rule

A common rule of thumb is to set aside 30% of your profit each month for tax. This covers:

• Income Tax (20% or 40% depending on your earnings)
• Class 2 National Insurance
• Class 4 National Insurance

For most basic-rate sole traders, 30% is slightly more than you will owe, providing a useful buffer. Higher-rate taxpayers may need to set aside 40-45%.

Why 30% Works

For a sole trader with £35,000 profit:

• Income Tax: approximately £4,486
• Class 2 NI: £179
• Class 4 NI: approximately £1,346
• Total: approximately £6,011 (about 17% of profit)

But remember payments on account — your January bill could be 150% of this in your second year. Setting aside 30% builds a buffer for payments on account and any income increases.

A Better Approach: Real-Time Estimates

Rather than guessing with a percentage, use software that calculates your actual tax liability in real time. Accounted shows your running tax estimate based on your actual income and expenses, updated every time a transaction is recorded.

This means you know precisely how much to save each month — no more guessing, no more surprises.

Practical Tips

• Open a separate savings account for tax money
• Transfer the estimated amount monthly (or weekly if you prefer)
• Do not touch the tax savings for anything else
• Review your estimate quarterly and adjust if your income has changed
• Consider HMRC's Budget Payment Plan — pay towards your bill monthly via Direct Debit

Penny, our AI bookkeeper, categorises your expenses automatically and flags anything that looks wrong. Try it free for 14 days.