How much of every invoice should I put aside for tax?

For a UK sole trader, a useful tax reserve starts with expected taxable profit and other income, rather than one fixed percentage of every invoice. Estimate Income Tax and National Insurance, then check when payments are due. Keep any VAT reserve separate. HMRC: working out your taxable profit.

A client pays your £2,000 invoice. Lovely. But before you mentally spend it, some of that money may already have a job: covering business costs or paying HMRC.

Should I base my tax reserve on turnover or profit?

For a sole trader, Income Tax and Class 4 National Insurance generally depend on taxable business profit, rather than the full amount clients pay you. Broadly, that means business income minus allowable expenses, with any other tax adjustments that apply. Your accounting method affects when income and costs are recognised. HMRC: business expenses, cash basis.

If your business income is £50,000 and allowable costs are £10,000, that leaves £40,000 profit before other adjustments. Moving money from your business account to your personal account doesn’t itself reduce that profit.

VAT needs its own calculation if you’re registered. Don’t treat the VAT collected from customers as spare spending money.

The rates behind the estimate

For 2026/27, the standard Personal Allowance is £12,570. In England, Wales and Northern Ireland, the basic rate is 20% on the next £37,700 of taxable income. Higher and additional rates are 40% and 45%. The Personal Allowance falls by £1 for every £2 of adjusted net income above £100,000, reaching zero at £125,140. Scotland has different Income Tax bands. HMRC: Income Tax rates.

Class 4 National Insurance is 6% on annual self-employed profits above £12,570 up to £50,270, then 2% above £50,270. Different slices of profit attract different rates; you don’t pay 26% on every pound. HMRC: self-employed NI.

Here are three worked examples, rounded to the nearest pound:

These calculations use the rates above and assume a sole trader below State Pension age in England, Wales or Northern Ireland, a full Personal Allowance, no other income, no pension contributions, no student loan repayments and no other adjustments. They exclude payments on account and VAT.

Turn that into a reserve you can actually use

Using the £40,000 profit example, estimated Income Tax and Class 4 NI total £7,131.80. That is about 17.8% of profit, or 14.3% of the £50,000 business income.

Those percentages use different starting points. If you transfer money whenever an invoice is paid, use a percentage calculated against expected receipts. If you reserve money after deducting business costs, use the profit-based percentage. Don’t accidentally treat them as interchangeable.

A practical routine is to estimate annual income and costs, calculate the likely bill, and compare that with what is already saved or paid. Revisit the estimate when a large project lands, costs change or work slows down. An extra margin can help with uncertainty, but no fixed buffer guarantees the bill is covered.

Two things to check separately

Payments on account. January can include the outstanding bill for a finished tax year and an advance instalment for the next one. Plan around payment dates as well as the annual tax total. HMRC: payments on account.

Your NI record in a quiet year. In 2026/27, profits of £7,105 or more generally mean Class 2 contributions are treated as paid. Below that, eligible people can choose to pay voluntary Class 2 at £3.65 a week. Check your record and whether paying would help before doing so. HMRC: self-employed NI.

If your trading income is very small, the £1,000 trading allowance may apply. It has exceptions and normally replaces actual expense deductions, rather than sitting on top of them. HMRC: trading allowance.

Your best starting point is your own likely profit and payment schedule. A tax pot based on those numbers is much more useful than borrowing someone else’s percentage.