How Much Should I Set Aside for Tax as a Sole Trader?

The right percentage to set aside for tax depends on four things: your income level, your allowable expenses, whether you also have a PAYE salary and whether your bill will exceed £1,000 triggering payment on account. A sole trader with no other income and moderate expenses typically needs around 25 to 30% of gross profit. Someone with employment income alongside self-employment may need to set aside over 40% on their self-employment earnings, because the personal allowance is already used by the salary. Generic percentages are a starting point, not an answer.

Dan left his corporate IT job in Sheffield in April 2025 and went self-employed as a consultant, invoicing between £5,000 and £7,000 each month from the start, as covered in our guide to what happens in your first year of self-employment. He set aside 20% of every payment he received, transferring it automatically into a savings account the moment it arrived. He had read somewhere that 20% was the right figure for a basic rate taxpayer.

By November 2025 he was wondering whether it was enough. By the time he sat down to calculate his full tax position, he found out it was not. Not because 20% was wildly wrong. Because it did not account for the payment on account, the higher rate band he had quietly crossed, or the compounding effect of both on his January total.

Why a Single Percentage Does Not Work

The advice to set aside 20% or 25% is not bad advice. It is incomplete advice. It will be close enough for some people and meaningfully wrong for others. The problem is that you cannot know which category you fall into without doing the actual calculation.

Four variables determine the right set-aside percentage for any individual sole trader.

Income level. The UK income tax system is progressive. As profit rises it crosses into higher tax bands. A sole trader with a trading profit of £57,600 is not simply paying more tax than one with a profit of £25,000. They are paying tax at 40% on the portion above the higher rate threshold of £50,270. That changes the set-aside percentage significantly.

Allowable expenses. The higher the allowable expenses relative to gross income, the lower the taxable profit. Two sole traders with identical gross income but different expense levels will need to set aside very different percentages to cover their tax.

Employment income. For sole traders who also have a PAYE salary, the personal allowance of £12,570 is applied against the salary first through payroll. By the time the self-employment profit is assessed, the allowance is already gone. Every pound of trading profit is taxable from the first pound. That makes the effective set-aside rate on self-employment income significantly higher than for a sole trader with no other income.

Payment on account. If the Self Assessment bill (income tax plus Class 4 NI) exceeds £1,000, HMRC requires a first payment on account of 50% due on 31 January alongside the main bill, and a second payment on account of 50% due on 31 July. The set-aside percentage needs to cover the combined January and July liability, not just the main bill. Otherwise the pot is correctly sized for January and empty for July.

Dan's Calculation: Where 20% Falls Short

Dan's gross invoicing for 2025/26 came to £72,000. After claiming allowable expenses of £14,400 across equipment, software subscriptions, professional development, mileage, home office costs and his phone proportion, his trading profit stood at £57,600. That figure put him into the higher rate band. The full list of expense categories he could claim, including four he had initially missed, is covered in our guide to expenses sole traders commonly miss.

The full calculation:

Trading profit: £57,600 Less personal allowance: £12,570 Taxable income: £45,030

Basic rate (£37,700 at 20%): £7,540 Higher rate (£7,330 at 40%): £2,932 Total income tax: £10,472

Class 4 NI: £37,700 at 6% = £2,262, plus £7,330 at 2% = £147 Total Class 4 NI: £2,409

Total Self Assessment bill: £10,472 + £2,409 = £12,881

Payment on account applies (bill exceeds £1,000). First payment on account: £12,881 x 50% = £6,440

Total due in January: £12,881 + £6,440 = £19,321 Total due the following July: £6,440 Combined liability across both dates: £25,761

The correct set-aside percentage for Dan:

January total divided by gross invoicing: £19,321 / £72,000 = 26.8% to cover January alone. Combined liability divided by gross invoicing: £25,761 / £72,000 = 35.8% to cover January and July across the year.

The right number to use for ongoing set-aside is the combined figure spread across the year. Building toward both payments simultaneously is far less painful than covering January from savings and scrambling for July six months later.

The Practical System: How to Set Aside Without Overthinking It

The simplest and most reliable system is not a spreadsheet calculation done once a year. It is an automatic transfer into a dedicated account the moment each invoice payment arrives, using a percentage calculated from real figures rather than borrowed from generic advice.

Open a separate savings account specifically for tax. Give it a name that makes its purpose clear. Dan called his "HMRC pot" so he was never tempted to dip into it. Set up an automatic transfer for the correct percentage every time a payment clears. If the bank does not support percentage-based automatic transfers, a manual transfer on the same day works just as well, provided the habit is consistent.

Review the set-aside percentage whenever income changes significantly. A percentage calculated on £3,000 monthly invoicing will be too low if invoicing regularly climbs to £5,000. A percentage set during a strong period may be unnecessarily high in a quieter one. The UK Sole Trader Tax Template for 2026/27 recalculates the Dashboard and the set-aside percentage automatically every time a new income or expense row is added. The percentage shown is always based on the current year-to-date position.

One practical note on timing. Set aside a percentage of gross income, not of profit. At the moment of receiving a payment you may not yet know the full expense picture for the year. Setting aside a percentage of gross income and adjusting at year end is simpler and safer than trying to calculate profit on the fly each time a payment arrives.

What to Do If the Pot Is Running Short

If the savings pot in November or December looks like it will not cover January, there are steps worth taking before concluding the position is unmanageable.

Check every allowable expense has been claimed. Missing expense categories are one of the most common reasons sole traders overestimate their tax bill. Finding a missed category in December can reduce the liability by hundreds of pounds. Our guide to expenses sole traders commonly miss covers the seven most frequently overlooked categories.

Check whether the payment on account can be reduced. If self-employment income in the current year is genuinely tracking lower than the previous year, it is possible to apply to HMRC to reduce the payment on account using form SA303. This is covered in detail in our payment on account guide. Reducing incorrectly means interest accrues on any shortfall, so this step requires a realistic income projection, not wishful thinking.

Contact HMRC about a Time to Pay arrangement. If the liability is going to exceed what is available regardless of the above, HMRC's Time to Pay arrangement allows the liability to be settled in monthly instalments. Making contact before the deadline always produces a better outcome than waiting until January has passed.

Dan's Position After the Recalculation

When Dan worked through the full picture in November 2025, his savings pot held £14,400. His January total was £19,321. The shortfall was just under £5,000, and he had ten weeks to cover it.

He increased his set-aside to 40% immediately. He took on a significant piece of work in December to accelerate the pot. He arrived at January with enough to cover the bill. July's payment on account of £6,440 was something he started planning for in February, the moment January was done.

The following April, when the 2026/27 tax year began, he set his set-aside at 36% from the first invoice, calculated from his actual 2025/26 figures using the UK Sole Trader Tax Template for 2026/27. By June he had already put more aside than his entire 2025/26 pot had contained by November. The January bill did not surprise him. He had been watching the number update in real time since April and knew what was coming months before it arrived.

Knowing the right percentage from the start of the year is not complicated. It just requires calculating it from real numbers rather than guessing at a round figure and hoping it is close enough.

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