How much should you set aside for tax as a sole trader?
The single biggest cash flow shock for a newly self-employed tradesperson is the first tax bill. The work is going well, money is coming in, and then January arrives with a demand that swallows a chunk of it. The fix is simple in principle: put money aside as you earn it, so the bill is already covered when it lands.
Want the exact figure? Use our free self-employed tax calculator to see how much of each payment to set aside for your 2026/27 tax bill.
What you are actually paying
As a sole trader you pay Income Tax and Class 4 National Insurance on your profit, which is your income after allowable business costs. You do not pay tax on money you spend on genuine business expenses like materials, tools and your van, only on what is left.
Everyone gets a tax free personal allowance, currently £12,570, before Income Tax starts. Above that you pay 20% up to the higher rate band, then 40% on income over roughly £50,000, with Class 4 National Insurance on top of the income tax within those bands. The exact rates shift over time, but the shape stays the same: the more you earn, the bigger the slice.
A rule of thumb that works
For most sole trader tradespeople earning within the basic rate band, setting aside somewhere between 20% and 30% of your profit covers the Income Tax and National Insurance comfortably. If you are pushing into the higher rate band, lean towards 30% or more on the income above that threshold.
The habit that makes this painless is to move your set aside percentage into a separate savings account every time you get paid, not once a year. Treat it as money that was never yours. When you get a £2,000 payment, £500 goes straight into the tax pot and you carry on. Do that all year and the January bill is already sitting there waiting.
The payment on account trap
There is a wrinkle that surprises almost everyone in their first proper year. If your tax bill is more than £1,000, HMRC usually asks you to make payments on account, which are advance payments towards next year's tax. You pay them in two instalments, on 31 January and 31 July, each one half of last year's bill.
In practice this means your first big January can be brutal. You pay the tax you owe for the year just gone, plus another 50% on top as the first payment on account for the year ahead. It can feel like being taxed twice. You are not, it is just being collected earlier, and it evens out in later years. But if nobody warns you, it is a horrible shock, so plan for it.
The dates to keep
Register for Self Assessment by 5 October after the end of your first tax year as self-employed. File your online return and pay what you owe by 31 January. If you make payments on account, the second one is due 31 July. Missing the January deadline brings an automatic £100 penalty even if you owe nothing, so it is worth getting the return in early rather than leaving it to the last night.
Make it easier on yourself
The reason people underpay is rarely laziness, it is that they lose track of what they actually earned once materials, cash jobs and card payments are all mixed together. If your income and expenses are recorded cleanly as you go, working out what to set aside becomes a two minute job rather than a shoebox nightmare in January.
Related guides
Keeping those records tidy through the year is exactly what TradePilot is built to help UK trades do, so the tax return is a formality rather than a fright. Join the waiting list and we will let you know when it launches.
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