Set aside a fixed share of your profit the day the money lands, and a tax bill can never ambush you. For most sole traders the right number is about £1 in every £5 — roughly 20% — kept in a separate account. Once your profit climbs past about £50,000 a year, push that towards £1 in every £4 (25%). That’s the whole answer. The rest of this is why those numbers are right for 2026/27, and the one date that catches nearly everyone in their first year.
Set aside on profit, not turnover
Tax is charged on your profit — what’s left after allowable expenses — not on everything that comes through the door. A decorator who invoices £60,000 but spends £20,000 on materials, fuel and tools is taxed on £40,000. Base your pot on profit and you won’t either over-save and starve the business of cash, or under-save and come up short.
If you’re only just starting, there’s a £1,000 trading allowance: earn less than that from self-employment in the year and you generally don’t need to tell HMRC at all. Above it, you’re into the figures below.
The numbers for 2026/27
Everyone gets a personal allowance of £12,570 — profit below that is tax-free. Above it:
- Income tax: 20% from £12,570 to £50,270, then 40% up to £125,140.
- Class 4 National Insurance: 6% on profit between £12,570 and £50,270, then 2% on anything above.
- Class 2 National Insurance: for most traders this is now £0 — if your profit is at least £7,105, HMRC treats it as paid, so you keep building your state pension record without handing anything over. Below £7,105 it’s voluntary, at £3.65 a week.
Stack income tax and Class 4 together and the effective rate rises as profit rises — which is exactly why a flat “just save 30%” rule makes you over-save at the bottom and under-save at the top.
Two worked examples
£40,000 profit. Income tax is 20% of (£40,000 − £12,570), which is £5,486. Class 4 NIC is 6% of that same £27,430, or £1,645.80. Class 2 is nothing. The actual bill is £7,131.80 — about 17.8% of profit, or £595 a month. Pot a clean 20% (£667 a month) and you’ll cover it with a cushion to spare.
£55,000 profit. Now part of your profit sits in the 40% band, so income tax works out at £9,432 and Class 4 NIC at £2,356.60 — a bill of £11,788.60, about 21.4% of profit, or £982 a month. Because every extra pound above £50,270 costs 42% (40% tax plus 2% NIC), set aside a fuller 25% (£1,146 a month) here, so the higher band never catches you out.
The date that catches people out
Tax for a year is due the following 31 January. For the profit you’re earning now, in 2026/27, that means 31 January 2028.
Here’s the trap. On that first 31 January, HMRC wants the whole year’s tax and a payment on account — an advance of 50% towards the next year’s bill. Then a second payment on account, another 50%, falls due on 31 July. So your first reckoning isn’t one year’s tax; it’s one and a half years’ worth on 31 January 2028, with the remaining half on 31 July 2028.
Payments on account kick in unless your last bill was under £1,000 or more than 80% of your tax was already collected at source — which, for a sole trader, usually means they apply. Almost nobody is warned about that 150% first hit, and it’s the most common reason a newly self-employed person’s tax pot comes up short. Save as if it’s coming, because it is.
A couple of things this isn’t
This is income tax and National Insurance on profit. VAT is separate — you only register once your turnover (not profit) passes £90,000 in a rolling 12 months, which most sole traders never reach. And these bands are for England, Wales and Northern Ireland; Scotland sets its own income tax rates.
The one habit that makes it work
Open a separate account, and the day a customer pays you, move your percentage across before you ever think of it as spendable. Treat the pot as money that was never yours — because it wasn’t. When 31 January comes round, the bill is just a transfer, not a crisis.