When you're employed, tax comes out of your pay before you see it. When you work for yourself, every payment lands in full, and some of it belongs to HMRC. The most common money problem for new sole traders isn't a lack of work. It's a tax bill in January that nobody saved for.
This article tells you roughly how much to put aside, and why the first year hits harder than you'd expect.
The short answer
For most sole traders in England, Wales and Northern Ireland with no other income, tax and National Insurance come to somewhere between 10% and 25% of profit. A simple rule that keeps you safe:
Put aside 20% of every payment if your yearly profit is under about £50,000, and 30% if it's over. In your first year of payments on account (explained below), put aside more.
First: it's worked out on profit, not on what you invoice
Your tax is based on your profit: what customers paid you, minus your allowable business expenses (materials, fuel, tools, insurance and so on). Invoice £40,000 and spend £10,000 on the business, and your profit is £30,000. That's the number that matters here. It's also why recording every expense saves you real money.
The two things you pay
Income Tax. The first £12,570 of your income each year is tax-free (your "personal allowance"). After that:
| Income (2026–27) | Rate |
|---|---|
| Up to £12,570 | 0% |
| £12,571 to £50,270 | 20% (basic rate) |
| £50,271 to £125,140 | 40% (higher rate) |
| Over £125,140 | 45% (additional rate) |
Only the slice of income inside each band is taxed at that band's rate. Earning £1 over £50,270 doesn't make all your income taxed at 40%, just that £1. (Above £100,000 the tax-free allowance starts to shrink, which is worth talking to an accountant about.)
Class 4 National Insurance. 6% on profit between £12,570 and £50,270, and 2% on profit above that. You no longer have to pay Class 2 National Insurance. It's treated as paid for you once your profit is over £7,105.
What that looks like in pounds
| Yearly profit | Income Tax | National Insurance | Total | Share of profit |
|---|---|---|---|---|
| £20,000 | £1,486 | £446 | £1,932 | about 10% |
| £30,000 | £3,486 | £1,046 | £4,532 | about 15% |
| £45,000 | £6,486 | £1,946 | £8,432 | about 19% |
| £60,000 | £11,432 | £2,457 | £13,889 | about 23% |
These figures assume the 2026–27 tax year, that you live in England, Wales or Northern Ireland, and that the business is your only income. Set aside more if you also have a job (your salary uses up the tax-free allowance, so almost all your business profit is taxed), you're repaying a student loan, or you live in Scotland, which has its own Income Tax bands.
Why the first year hurts: payments on account
Once your yearly tax bill is over £1,000, HMRC asks you to start paying next year's tax in advance, in two halves called payments on account, each half of last year's bill. The first one is due on the same day as the bill for the year just gone.
Example. Sam's first full year makes £30,000 profit, so the bill is £4,532. On 31 January Sam pays that £4,532 plus a first payment on account of £2,266 towards the current year: £6,798 in one go. Another £2,266 follows on 31 July. From then on it evens out, because each year's advance payments are counted against that year's bill.
That's why the first January catches people out. If you're in your first year or two, set aside closer to 30% even on a modest profit.
A simple system that works
Open a separate savings account and call it "Tax". Every time a customer pays you, move your percentage across straight away, before you spend anything. Money you can't see is money you don't spend.
Check it every few months against your actual profit so far, and top up if you're behind.
If you're VAT-registered, the VAT you charge customers was never yours. Keep it apart too, on top of your tax money.
In Invoice4You, the Home screen keeps a running estimate of the tax to set aside, based on what you've been paid and the expenses you've recorded this tax year. Keep your expenses up to date and the estimate stays close to reality.
Sources: HMRC, Income Tax rates and allowances; HMRC, Self-employed National Insurance rates; HMRC, Payments on account. Figures are for the 2026–27 tax year and rounded to the nearest pound. This is general information, not tax advice.