How Much Tax Should You Set Aside as Self-Employed in the UK?
Quick Answer
Most UK sole traders should set aside 25–30% of their profit for Income Tax and National Insurance. The exact percentage depends on how much you earn. If you're just starting out or earning under £12,570, you may not owe anything—but it's still wise to save a buffer.
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Why You Need to Set Money Aside
When you're employed, your employer deducts tax automatically through PAYE. As a self-employed person, that doesn't happen. You're responsible for:
- Working out your own tax
- Submitting a Self Assessment return
- Paying HMRC by the deadline
If you spend everything you earn, January can hit hard. Setting money aside regularly avoids nasty surprises.
Profit vs Turnover: A Key Distinction
One of the biggest mistakes people make is confusing turnover with profit.
- Turnover = Total income before expenses
- Profit = Turnover minus allowable business expenses
You pay tax on profit, not turnover.
If you invoice £40,000 but have £10,000 in legitimate business expenses, your taxable profit is £30,000—not £40,000.
Understanding this is critical. It's also why tracking your allowable expenses matters so much.
How Much to Set Aside: A Simple Guide
Here's a rough guide based on annual profit:
| Annual Profit | Suggested Set-Aside |
|---|---|
| Under £12,570 | 0–5% (buffer only) |
| £12,570 – £25,000 | 20–22% |
| £25,000 – £40,000 | 23–26% |
| £40,000 – £50,000 | 26–28% |
| £50,000 – £80,000 | 28–32% |
| Over £80,000 | 32%+ |
These percentages cover both Income Tax and Class 4 National Insurance. Rates can change, so always check the latest HMRC guidance.
Worked Example
Sarah is a freelance graphic designer.
- Monthly income: £4,000
- Monthly expenses: £600 (software, equipment, travel)
- Monthly profit: £3,400
- Annual profit estimate: £40,800
Based on her income band, she sets aside 27% of profit.
Monthly set-aside: £3,400 × 0.27 = £918
Over the year, that's roughly £11,000—which should cover her tax bill with a small buffer.
Sarah transfers this to a separate savings account the moment she gets paid. She never touches it.
A Simple Monthly Routine
Follow this checklist each month:
- Record all income received (invoices paid, not sent)
- Track expenses with receipts or bank statements
- Calculate profit (income minus expenses)
- Transfer set-aside to a dedicated savings account
- Review quarterly to adjust your percentage if needed
This takes 30 minutes a month and saves hours of stress in January.
What About National Insurance?
As a self-employed person, you pay:
- Class 2 NI – a small fixed weekly amount (often collected through your SA bill)
- Class 4 NI – a percentage of your profits
Class 4 NI is typically around 6% on profits between £12,570 and £50,270, and 2% above that. These rates can change, so the set-aside percentages above already include NI.
Common Mistakes
1. Setting aside a percentage of turnover, not profit
This often leads to saving too much (or getting confused). Always calculate profit first.
2. Not saving anything in the early months
"I'll catch up later" usually doesn't work. Start from month one.
3. Keeping tax money in a current account
It's too easy to spend. Use a separate savings account—ideally one you can't access with a debit card.
4. Forgetting about Payments on Account
If your tax bill is over £1,000, HMRC may ask for advance payments towards next year. This means you might pay more than expected in January. Learn how Payments on Account work.
5. Underestimating expenses
Track everything you're entitled to claim. Missing expenses means paying more tax than necessary.
FAQ
Do I pay tax on my turnover or profit?
Profit. You deduct allowable expenses from your turnover first.
Should I save 20% or 30%?
It depends on your profit level. 20% might be enough if you earn under £30,000. Higher earners should save 28–32% to cover higher-rate tax.
What about National Insurance?
Class 4 NI is included in the set-aside percentages above. You may also pay a small Class 2 contribution.
What if I earn under £12,570?
You won't owe Income Tax, but you might still owe a small amount of NI. Save a 5% buffer just in case.
Can I reduce my tax bill?
Yes—by claiming all allowable expenses you're entitled to. This reduces your profit and therefore your tax.
How do I know my profit in advance?
You estimate based on your income and expenses so far. Review and adjust each quarter.
What happens if I set aside too much?
You get to keep the extra. Much better than the alternative.
Should I use a separate bank account?
Strongly recommended. It removes the temptation to spend your tax money.
When do I actually pay the tax?
Usually by 31 January after the end of the tax year. But if you're subject to Payments on Account, you'll also pay in July. See our deadlines checklist.
What if I can't afford to set aside that much?
Start with whatever you can—even 10%—and increase over time. Something is better than nothing.
Next Steps
Don't guess. Use our free calculator to estimate your actual tax based on your income and expenses.
Or explore more guides in our Learn hub.
This guide is for general information only. Tax rules change, and everyone's situation is different. Always check the latest HMRC guidance and consider speaking to a qualified accountant if you're unsure.