How much should I put aside for tax when I'm self-employed?

When you're employed, tax just disappears from your payslip before you see it. When you work for yourself, it's all on you. And the first January bill has made plenty of us gulp.

The good news? It's very manageable once you have a system. Here's the simple version.

The short answer

Put aside 20 to 30% of your profit in a separate savings account. If you're just starting out and earning a modest amount, 20% is usually plenty. If you're earning more, lean towards 30%.

That's not an exact figure. It's a safety net. Better to have a little left over in February than to be scrabbling around.

What you're actually paying

As a sole trader in the UK you pay two things on your profit (that's what you earn minus your allowable business costs):

• Income Tax. Most people get a tax-free Personal Allowance first. After that, the basic rate is 20%, and it goes up for higher earners.
• National Insurance. Self-employed people pay Class 4 NI on profits above a threshold.

The rates and thresholds change, so check the current figures on gov.uk. Or ask an accountant. Honestly, a good one usually pays for themselves.

Profit, not income

This catches a lot of people out. You're taxed on profit, not on everything that comes in.

So if you invoiced £20,000 this year and spent £3,000 on materials, software, training and travel for the business, you're taxed on £17,000. That's why keeping receipts matters. Every genuine business cost lowers your bill.

Watch out for payments on account

Here's the bit nobody warns you about. Once your tax bill is over £1,000, HMRC usually asks you to pay towards next year's bill in advance. These are called payments on account.

In practice, your first big January bill can be your tax for last year plus half of next year's. It's the reason so many people get a shock in year two. Your tax pot is what saves you here.

A simple system that works

1. Open a separate savings account and call it "Tax". Seriously, name it.
2. Every time a client pays you, move 25% across straight away. Before you spend a penny.
3. Track your income and expenses as you go, not in a panic in January. (Members, there's a ready-made tracker in the Resources area.)
4. Register for Self Assessment by 5 October after the tax year you started.
5. File and pay by 31 January.

That's it. Boring? A bit. But boring is exactly what you want from your tax.

When to get help

If you're VAT registered, thinking about becoming a limited company, or your income has jumped a lot, it's worth speaking to an accountant. You don't have to work it all out alone.

And if you'd like to chat it through with people who've been there, come along to a catch-up. Tax is one of the most common things people swap notes on over coffee. ☕

This is general information, not financial advice. Rates and rules change, so always check gov.uk or speak to an accountant about your own situation.