How Much to Save for Tax: UK Sole Trader Guide (25–30% Rule)

One of the biggest financial shocks for new sole traders is the January tax bill. You have been earning all year, spending what seemed reasonable, and then HMRC presents an amount you have not kept aside. The solution is straightforward: set aside a percentage of every payment you receive — automatically, into a separate account — from day one. This guide tells you exactly how much to save and how to build the system.

Why sole trader tax saving is different from employment

When you are employed, your employer deducts income tax and National Insurance from your salary before you receive it. You never see the money, so you cannot spend it. As a sole trader, you receive your full invoiced amount and are entirely responsible for setting aside the tax portion yourself.

The Self Assessment deadline is 31 January. You are potentially paying tax on income earned up to 22 months earlier. Without a consistent saving habit, that money is long gone by the time the bill arrives — spent on entirely reasonable things along the way.

Understanding payment on account makes this even more important: in your first year with a bill over £1,000, HMRC asks for your full year's tax plus a 50% advance payment toward the following year, all due in January. Saving 25–30% throughout the year is the buffer that makes this manageable.

The 25–30% rule for UK sole traders

For most UK sole traders earning between £20,000 and £80,000 per year, saving 25–30% of every client payment covers:

• Income tax at 20% on profits above the personal allowance (£12,570 in 2025–26)
• Class 4 National Insurance at 8% on profits between £12,570 and £50,270
• Class 2 National Insurance — a flat-rate contribution included in your Self Assessment bill

If your income is approaching or above the higher rate threshold (£50,270), more of your profit is taxed at 40%, so save closer to 35–40% of each payment.

If your income is lower — around £20,000–£25,000 — you might manage on 20%, but 25% gives you a useful cushion for years where income is higher than expected or the payment on account system bites for the first time.

How to set up a tax savings account

The most reliable method is a dedicated savings account that you treat as untouchable until January (and July for payment on account).

Step 1: Open a separate account

A simple easy-access savings account works well. Many sole traders use Starling, Monzo, or Mettle, all of which let you create named savings spaces or pots within your account — useful if you want to avoid opening a separate account altogether. If you want a combination of a business current account and a built-in savings pot, the best business bank accounts for sole traders covers the main options with a direct comparison of features and fees.

Step 2: Transfer on the day payment arrives

Every time a client payment lands, transfer 25–30% to your tax pot the same day — not at the end of the month, not when you remember, but the same day. The money you never see sitting in your main account is the money you will not spend. Make it a reflex rather than a monthly decision.

Step 3: Treat it as HMRC's money

The tax pot is not yours. Mentally, it belongs to HMRC from the moment you transfer it. Any withdrawal from it before the tax deadline is, in effect, borrowing from HMRC — which comes with interest and potential penalties if it means you cannot pay on time.

When you need to pay — the key dates

Your Self Assessment tax payments fall on two fixed dates each year:

Payment	Due date
Balancing payment (previous year) + first payment on account	31 January
Second payment on account	31 July

Put both dates in your calendar with a reminder a month before each. If you are new to self-employment, read our full guide on payment on account — the January figure is almost always higher than new sole traders expect, because it bundles the current year's balancing payment with an advance payment toward next year.

Using accounting software to track your tax position

FreeAgent, Xero, and QuickBooks all show you a running estimate of your tax liability as the year progresses. Checking this figure monthly — or even weekly — removes the uncertainty around your January bill before it becomes a problem.

FreeAgent includes a tax timeline dashboard that displays exactly what you owe and when it is due. It is one of the most genuinely useful features in any sole trader accounting tool, and it is included in all FreeAgent plans. NatWest, RBS, Ulster Bank, and Mettle business account holders get FreeAgent free — worth checking if you bank with any of them.

Reducing your allowable expenses correctly through accounting software also matters here: every legitimate business expense you claim reduces your taxable profit and therefore your tax bill — which means the 25–30% you set aside may give you a pleasant overpayment to roll into the following year.

If you are not yet sure which software is right for your situation, the MTD software chooser tool asks a few questions and gives you a personalised recommendation.

What to do if you have already undersaved

If January is approaching and you have not put enough aside, act quickly rather than ignoring the problem. HMRC does allow payment arrangements for people who genuinely cannot pay in full. You can set up a Time to Pay arrangement through your HMRC online account or by calling the HMRC helpline directly. Interest is charged on the outstanding amount, but arranging it proactively before the deadline avoids the additional late payment penalties that kick in afterwards.

If you find yourself in this position, treat it as the prompt to build a proper saving system immediately — so that next January is not a repeat.

The short version

Set aside 25–30% of every payment the day it arrives, into an account you do not touch. For higher earners, push that to 35%. Check accounting software monthly to see your actual tax liability. Pay on 31 January and 31 July. That is the entire system — the challenge is simply making it automatic rather than optional.