The number one financial shock for new sole traders is the tax bill — and the payments on account that can land alongside it. Here's how much to set aside in 2026/27 so the deadline is never a surprise.
The simple rule of thumb
Set aside 25–30% of your profit (income minus expenses) as you earn it. Keep it in a separate savings pot and you'll comfortably cover Income Tax and National Insurance for most income levels. Higher earners crossing into the 40% band should lean toward 35–40%.
What you actually pay
As a sole trader your tax has two parts:
- Income Tax on profit above your Personal Allowance.
- Class 4 National Insurance on profit above the lower profits limit.
2026/27 Income Tax bands (illustrative)
| Band | Rate |
|---|---|
| Up to £12,570 (Personal Allowance) | 0% |
| £12,571 – £50,270 | 20% |
| £50,271 – £125,140 | 40% |
| Over £125,140 | 45% |
The Personal Allowance tapers away once income exceeds £100,000.
Worked examples
| Profit | Income Tax | Class 4 NI | Total | Set aside |
|---|---|---|---|---|
| £25,000 | ~£2,486 | ~£746 | ~£3,232 | ~13% |
| £45,000 | ~£6,486 | ~£1,946 | ~£8,432 | ~19% |
| £70,000 | ~£15,432 | ~£2,657 | ~£18,089 | ~26% |
These are simplified 2026/27 estimates for illustration — your figure depends on your exact allowances and circumstances. A live tax estimator shows your precise number.
Don't forget payments on account
This is what catches people out. If your tax bill is over £1,000, HMRC asks you to pay payments on account — advance instalments toward next year's bill. They're due 31 January and 31 July, each typically 50% of your previous year's tax.
In your first year this means your January bill can be 150% of your actual tax: the year you owe, plus the first payment on account. Budgeting for this in advance is essential.
A practical saving system
- Open a separate tax savings account.
- Every time a client pays, move 25–30% of it across immediately.
- Watch your live tax estimate so you can fine-tune the percentage.
- Diarise 31 January and 31 July.
Reduce the bill legitimately
The simplest way to lower your tax is to claim every allowable expense — see what freelancers can claim. Pension contributions and, where relevant, the trading allowance can also help. Software that captures every cost ensures you never overpay by forgetting a deduction.
Frequently asked questions
How much should I save? 25–30% of profit for most; more once you hit the 40% band.
Do sole traders pay National Insurance? Yes, Class 4 NI on profits above the threshold.
What are payments on account? Advance instalments due 31 Jan and 31 Jul, each ~50% of last year's tax.
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