How Much Should You Set Aside for Tax? A 2026/27 Guide for Sole Traders and Small Businesses

25 Sep How Much Should You Set Aside for Tax? A 2026/27 Guide for Sole Traders and Small Businesses

Tax bills can feel difficult to predict when your income changes from month to month. This is especially true if you are a sole trader, freelancer or small limited company director and you do not receive a regular payslip showing tax deductions.

The good news is that you can make tax much easier to manage by setting money aside regularly.

As a general guide:

• Many sole traders set aside 25% to 30% of their taxable profit for income tax, Class 4 National Insurance and payments on account.
• If you are likely to pay higher-rate tax, consider setting aside 35% to 40%.
• A limited company will often reserve 19% to 25% of taxable profits for Corporation Tax, depending on its profit level.
• Your exact figure depends on profit, other income, allowable expenses, tax reliefs and whether you already make payments on account.

This guide covers the main rules for the 2026/27 tax year, which runs from 6 April 2026 to 5 April 2027. The income tax figures below apply to England, Wales and Northern Ireland. Scotland has different income tax bands.

How much should a sole trader set aside?

For many sole traders, saving around 25% to 30% of taxable profit each month is a sensible starting point.

The important word is profit, not turnover. Your taxable profit is broadly your business income less allowable business expenses.

For 2026/27, the standard income tax position is:

Taxable income	Income tax rate
Up to £12,570	0% Personal Allowance
£12,571 to £50,270	20%
£50,271 to £125,140	40%
Over £125,140	45%

Sole traders may also pay Class 4 National Insurance on their trading profits:

• 6% on profits between £12,570 and £50,270
• 2% on profits above £50,270

This means that profit within the basic-rate band can have a combined marginal cost of approximately 26%: 20% income tax plus 6% Class 4 National Insurance.

As a practical guide:

• If most of your profit falls within the basic-rate band, set aside 25% to 30%.
• If your profit is approaching or entering the higher-rate band, consider 35% to 40%.
• If you have employment income, rental income, dividends or other taxable income, you may need to save more because your Personal Allowance and tax bands may already be partly used.
• If your income is over £100,000, your Personal Allowance gradually reduces and disappears at £125,140.

These are planning percentages rather than tax calculations. Your accountant should calculate your actual liability using your full figures.

A simple sole trader example

Use your estimated annual profit to create a tax reserve rather than relying on monthly income alone.

Imagine your estimated taxable profit for 2026/27 is £40,000, with no other taxable income.

A broad calculation would be:

• The first £12,570 falls within the Personal Allowance.
• The remaining £27,430 is broadly taxed at 20%, giving income tax of approximately £5,486.
• Class 4 National Insurance at 6% on £27,430 is approximately £1,646.
• Total income tax and Class 4 National Insurance is approximately £7,132.

That is around 18% of total profit, but the marginal rate on the profit above the Personal Allowance is higher. Allowing for changes in income, timing differences and payments on account, setting aside 25% of profit would provide a more comfortable buffer.

If your profit was £60,000, you would also begin using the higher-rate band. A reserve closer to 30% or more may be appropriate, depending on your circumstances.

What are payments on account?

Payments on account are advance payments towards your next Self Assessment bill, not an additional tax.

HMRC normally requires payments on account when:

• Your Self Assessment tax bill is more than £1,000; and
• Less than 80% of your tax is already collected at source, such as through PAYE.

Each payment on account is usually 50% of your previous year’s income tax and Class 4 National Insurance liability.

The usual deadlines are:

• 31 January: first payment on account
• 31 July: second payment on account
• 31 January following the end of the tax year: any balancing payment, together with the first payment on account for the next year

For example, suppose your 2025/26 tax liability is £5,000 and you have no payments on account already made. Your bill due by 31 January 2027 could include:

• £5,000 balancing payment for 2025/26
• £2,500 first payment on account for 2026/27

You would then pay a further £2,500 by 31 July 2027.

This is why the first substantial Self Assessment bill can feel unexpectedly large. It may include your previous year’s tax plus an advance payment towards the next year.

You can read more about the rules on HMRC’s payments on account guidance.

If your income has fallen significantly, you may be able to apply to reduce your payments on account. However, reducing them too far can lead to interest and an additional amount to pay later. Take advice before making that decision.

Why monthly saving works better than a January panic

Treat tax saving as a regular business cost rather than an annual surprise.

Each month:

1. Review your year-to-date taxable profit.
2. Apply a cautious tax percentage.
3. Transfer the money into a separate savings account.
4. Reconcile the amount against your latest tax estimate.
5. Increase or reduce future transfers if your circumstances change.

For example, if your monthly taxable profit is £4,000 and you are saving 25%, transfer approximately £1,000 to your tax reserve. This money is not available for general spending. It is being held for HMRC.

A separate account can make this habit easier. It also gives you a clearer view of the money that genuinely belongs to your business after allowing for tax.

Do not forget to review your reserve if:

• Your income increases or decreases.
• You take on a new contract.
• You begin receiving PAYE income.
• Your allowable expenses change.
• You become a higher-rate taxpayer.
• You start making payments on account.

How much should a limited company set aside?

A limited company should usually reserve between 19% and 25% of its taxable profits for Corporation Tax.

Corporation Tax is paid by the company, not directly by the director as an individual. For the current rules:

• Companies with profits of £50,000 or less generally pay the 19% small profits rate.
• Companies with profits above £250,000 generally pay the 25% main rate.
• Companies with profits between £50,000 and £250,000 may receive marginal relief, resulting in an effective rate between 19% and 25%.

The thresholds may be reduced where a company has associated companies or a short accounting period.

As a cautious planning approach, many companies reserve 25% of taxable profits until their accounts and Corporation Tax calculation have been prepared. This can avoid spending money that may later be needed for HMRC.

Remember that Corporation Tax is calculated on taxable company profits, not simply on money in the company bank account. Your accounts may need adjustments for items such as depreciation, disallowable expenses, capital allowances and timing differences.

Directors also need to consider their personal tax position. Salary, dividends and benefits are separate from the company’s Corporation Tax calculation, and dividends are not normally deductible when calculating company profits.

You can find more information in HMRC’s Corporation Tax rates guidance, or read our guide on whether becoming a limited company may be suitable for you.

How good bookkeeping helps you see what you owe

Up-to-date bookkeeping gives you a more realistic tax estimate before the deadline arrives.

If your records are months behind, it is difficult to know:

• How much profit you have actually made.
• Whether all business expenses have been recorded.
• Which invoices remain unpaid.
• Whether your tax reserve is sufficient.
• How your current results compare with the previous year.

With accurate bookkeeping in Xero, you can review your income and expenses throughout the year rather than waiting for your accountant to reconstruct everything after year-end. A current profit and loss report can help you decide how much to transfer into your tax savings account.

Xero cannot replace professional tax advice, and its figures still depend on accurate records and correct categorisation. However, it gives you a useful day-to-day view of your business finances.

Our bookkeeping guidance explains why keeping your records current matters for cash flow and estimated tax.

Plan ahead with Harrison’s Accountancy

The right reserve depends on your whole financial position, not a single percentage.

A rough percentage is useful, but it should be reviewed alongside your accounts, other income, business structure and expected profit. Payments on account can also change the amount required at each deadline.

Harrison’s Accountancy is a friendly team of qualified Chartered Accountants helping sole traders, freelancers, directors and small businesses plan ahead. We can support you with bookkeeping, Xero, Self Assessment, management accounts, Corporation Tax and wider business advice.

If tax bills are causing concern, do not wait until 31 January. Book a call with Harrison’s Accountancy to discuss your position and create a practical plan for the year ahead.

This article is for general information and reflects the 2026/27 position at the time of writing. Tax rules and your personal circumstances can change. Obtain professional advice before relying on a percentage or making a payment-on-account reduction request.