How Much Tax to Set Aside When Self-Employed (2026/27)
Quick answer
As a self-employed sole trader, set aside roughly 20-25% of profit if you are a basic-rate taxpayer, 35-40% if higher-rate, and more once profit passes GBP 100,000. But your first bill is around 1.5x one year of tax, because HMRC adds payments on account.
How much to set aside for tax by profit band (2026/27)
| Profit band or situation | Marginal rate (Income Tax + Class 4 NI) | Suggested set-aside |
|---|---|---|
| First GBP 12,570 of profit | 0% Income Tax, 0% Class 4 NI | Nothing on this slice |
| GBP 12,570 to GBP 50,270 | 20% + 6% = 26% on this slice | 20-25% of total profit |
| GBP 50,270 to GBP 100,000 | 40% + 2% = 42% on this slice | 30-35% of total profit |
| GBP 100,000 to GBP 125,140 | 60%+ effective (Personal Allowance taper) + 2% | 40%+ of total profit |
| Over GBP 125,140 | 45% + 2% = 47% on this slice | 40-45% of total profit |
| PAYE side-hustler over the GBP 1,000 trading allowance | Your top marginal rate from the first GBP 1 of profit | 20%, 40% or 45% of profit, matching your top band |
| First Self Assessment bill | Bill plus a 50% payment on account | Up to 1.5x one year of tax |
Step by step
- 1
Estimate your profit, not your turnover
You pay tax on profit (income minus allowable expenses), not on everything that lands in your account. Work from a realistic profit figure for the tax year.
- 2
Find your band and set-aside percentage
Use the table above. Basic-rate profit needs roughly 20-25% set aside, higher-rate around 35-40%. Remember the first GBP 12,570 is free of Income Tax and Class 4 NI.
- 3
Move the percentage the day each invoice is paid
When a client pays, immediately transfer your set-aside percentage into a separate tax savings account. Do not wait until January to find the money.
- 4
Add a buffer for your first year
If your first bill is GBP 1,000 or more, budget for around 1.5x one year of tax in that first January, because of payments on account.
- 5
File and pay by 31 January, then 31 July
File your Self Assessment return and pay your balancing payment plus first payment on account by 31 January. The second payment on account is due by 31 July.
"Set aside 30% for tax" is the advice you will see everywhere, and for many self-employed people it is wrong in both directions. It over-reserves on your first GBP 12,570 of profit, which carries no Income Tax and no Class 4 National Insurance at all, and it under-reserves once profit climbs above GBP 50,270. You do not owe a flat rate; you owe a stack. The table above gives the honest set-aside percentage by band for the 2026/27 tax year.
The number almost no one leads with is the payments-on-account trap. Take a sole trader with GBP 40,000 of profit. Income Tax is 20% on the GBP 27,430 above the Personal Allowance, which is GBP 5,486. Class 4 NI is 6% on that same GBP 27,430, which is GBP 1,645.80. That is about GBP 7,132 in tax and NI, roughly 18% of profit. But because the bill is over GBP 1,000, the first January demand is that GBP 7,132 plus a 50% payment on account of GBP 3,566, totalling around GBP 10,700, with a second GBP 3,566 instalment due the following 31 July. Your first bill is effectively 1.5x what the percentage rules of thumb imply, which is why a first-timer should reserve up to 150% of one year's tax.
There is one group the flat-percentage advice fails completely: the employed side-hustler. If you already have a PAYE job, your Personal Allowance is used up by your salary, so every GBP 1 of side-business profit above the GBP 1,000 trading allowance is taxed at your top marginal rate from the very first pound. A higher-rate employee should set aside 40%, not 20%, of side profit. For the cash-flow discipline behind all of this, see sole trader cash management, and keep the tax pot in a dedicated account, not your current account. Compare the options in our business bank accounts comparison and read payments on account explained before your first January.
Figures are for the 2026/27 tax year and are taken from gov.uk; tax rules and thresholds can change. This is general information, not financial or tax advice.
Frequently asked questions
How much tax should I put aside as a sole trader?
A safe blunt default is 25-30% of profit for a basic-rate sole trader, but the honest figure depends on your band. The first GBP 12,570 of profit is free of Income Tax and Class 4 NI, then you pay 26% on profit up to GBP 50,270 and 42% above it. Set aside more in your first year for payments on account.
What percentage should I set aside for self-employment tax?
Between roughly 20% and 45% of profit, depending on your total income. A basic-rate sole trader on around GBP 40,000 profit owes about 18% of profit in Income Tax and Class 4 NI, but reserving 25-30% gives a buffer. Higher-rate earners should reserve 35-40%.
Do self-employed pay 40% tax?
Only on the slice of profit above GBP 50,270. The 40% higher rate is marginal, not your whole bill. Profit up to GBP 12,570 is tax-free, the next slice to GBP 50,270 is taxed at 20% Income Tax plus 6% Class 4 NI, and only profit above GBP 50,270 is taxed at 40% (plus 2% Class 4 NI).
Why is my first self-employed tax bill so high?
Because of payments on account. If your Self Assessment bill is GBP 1,000 or more, HMRC asks you to pay it plus a 50% advance instalment towards next year. So your first January demand is around 1.5x one year of tax. A second 50% instalment is then due on 31 July.
Where should I keep the money I set aside for tax?
In a separate savings account, not your current account. A tax reserve can sit untouched for months, so an easy-access savings account paying interest earns you real money on it. HMRC does not pay you to hold its tax, so do not leave the pot in a 0% account.
Sources
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General information, not financial advice. Tax rules and figures can change; check the current position on gov.uk before acting.