How Much Tax Should I Save? Self-Employed Guide 2026/27
Quick Answer
If you're self-employed, a safe starting point is to set aside 25% of your profit for tax if your total income stays under £50,270, or 35-40% if it goes above that. This covers Income Tax and Class 4 National Insurance. It's an estimate, not an exact figure — the only way to know your precise bill is to run the numbers, but 25-30% keeps most sole traders safely covered.
Remember: you're taxed on profit (income minus allowable business expenses), never on your total turnover.
Step 1: Work Out Your Profit
Profit = total self-employment income − allowable business expenses. Common allowable expenses include office costs, travel, a proportion of home-working costs, equipment, and professional fees. Keep records of everything — HMRC only taxes what's left after genuine business costs are deducted.
Example: £40,000 income − £8,000 expenses = £32,000 profit. Tax is calculated on the £32,000, not the £40,000.
Step 2: Apply the Right Percentage
How much of your profit HMRC actually takes depends on your total income for the year — including any employment income, if you also have a job. Two tax charges apply to self-employment profit:
- Income Tax — 0% up to your Personal Allowance (£12,570), then 20% up to £50,270, then 40% above that (45% above £125,140).
- Class 4 National Insurance — 6% on profits between £12,570 and £50,270, then 2% above £50,270.
Combine the two and a rough rule of thumb emerges: about 25% of profit within the basic rate band, rising to around 35-40% for profit taxed at the higher rate.
Quick Reference Table
| Total Taxable Income | Suggested Set-Aside % | Covers |
|---|---|---|
| Under £12,570 | 0% | Within your tax-free Personal Allowance |
| £12,570 – £50,270 | 25% | 20% Income Tax + ~6% Class 4 NI (blended) |
| Over £50,270 | 35-40% | 40% Income Tax + 2% Class 4 NI on the portion above £50,270 |
| First year self-employed | 30-35% | Add a buffer for Payments on Account (see below) |
Worked Examples
Example 1: £30,000 profit, self-employment only
Personal Allowance covers the first £12,570. The remaining £17,430 is taxed at 20% (£3,486) plus Class 4 NI at 6% on profit above £12,570 (£1,046). Total tax and NI: roughly £4,532 — about 15% of total profit, but closer to 26% of the portion above the tax-free allowance. Setting aside 25% of the full £30,000 (£7,500) leaves a comfortable buffer.
Example 2: £65,000 profit, self-employment only
The portion above £50,270 (£14,730) is taxed at 40% Income Tax plus 2% Class 4 NI. Combined with the basic-rate portion below, total tax and NI comes to roughly £16,800 — about 26% of total profit. Because part of the income sits in the higher-rate band, saving 30-35% is the safer target.
Payments on Account
If your Self Assessment bill is over £1,000, HMRC usually asks for Payments on Account — two advance instalments of 50% each toward next year's tax bill, due on 31 January and 31 July. This means your first tax bill as a sole trader can be 150% of what you'd expect (this year's bill plus the first instalment toward next year), which catches many newly self-employed people out.
If this applies to you, save closer to 30-35% in your first year or two until your cash flow adjusts to the payment pattern.
Common Mistakes to Avoid
- Saving a percentage of turnover instead of profit — this leads to over-saving and locks up cash unnecessarily.
- Forgetting Payments on Account — the single biggest cause of cash-flow shock for new sole traders.
- Mixing tax savings with everyday spending — keep it in a separate account you don't touch.
- Not accounting for other income — a second job or rental income can push your self-employment profit into a higher tax band than you expect.