How much of every invoice should I put aside for tax?
For a UK sole trader, a useful tax reserve starts with your expected taxable profit and other income, not one fixed percentage of every invoice. Estimate your Income Tax and National Insurance, then check when the payments are due. Keep any money you set aside for VAT separate. HMRC: working out your taxable profit.
A client pays your £2,000 invoice. Lovely. But before you spend it in your head, 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?
As a sole trader, your Income Tax and Class 4 National Insurance usually depend on your taxable business profit, not the full amount clients pay you. Broadly, that’s your business income minus allowable expenses, with any other tax adjustments that apply. Your accounting method affects when income and costs are counted. 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, on its own, reduce that profit.
What about VAT? If you’re registered, it needs its own calculation. Don’t treat the VAT you collect from customers as spare money to spend.
The rates behind the estimate
For 2026/27, the standard Personal Allowance, the amount of income you don’t pay Income Tax on, is £12,570. In England, Wales and Northern Ireland, the basic rate is 20% on the next £37,700 of taxable income. The higher rate is 40% and the additional rate is 45%. The Personal Allowance goes down by £1 for every £2 of adjusted net income above £100,000, until it reaches 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 are charged at different rates. You don’t pay 26% on every pound. HMRC: self-employed NI.
Wondering whether these rates and bands could change? Our Autumn Budget 2026 round-up for the self-employed covers what’s decided and what’s still rumour.
Here are three worked examples, rounded to the nearest pound:
Annual profit | Income Tax | Class 4 NI | Combined | Share of profit |
|---|---|---|---|---|
£30,000 | £3,486 | £1,046 | £4,532 | 15.1% |
£50,000 | £7,486 | £2,246 | £9,732 | 19.5% |
£70,000 | £15,432 | £2,657 | £18,089 | 25.8% |
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
no other adjustments
They exclude payments on account and VAT.
Turn that into a reserve you can actually use
Take the £40,000 profit example. Estimated Income Tax and Class 4 NI come to £7,131.80. That’s about 17.8% of profit, or 14.3% of the £50,000 business income.
Those percentages start from different figures. If you move money across each time an invoice is paid, use a percentage worked out against the money you expect to receive. If you set money aside after taking off business costs, use the percentage based on profit. Don’t mix them up by accident.
A practical routine is to estimate your income and costs for the year, work out the likely bill, and compare it with what you’ve already saved or paid. Update the estimate when a large project lands, your costs change or work slows down. Adding an extra margin can help with uncertainty. But no fixed buffer guarantees the bill is covered.
Two things to check separately
Payments on account. Your January payment can include the unpaid bill for a tax year that has finished, plus an advance payment towards the next one. So plan around the payment dates, not just the total tax for the year. 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, if you qualify, you can choose to pay voluntary Class 2 at £3.65 a week. Before you do, check your record and whether paying would help. HMRC: self-employed NI.
If your trading income is very small, the £1,000 trading allowance may apply. There are exceptions. It normally replaces your actual expense deductions, rather than being added on top of them. HMRC: trading allowance.
Start with your own likely profit and payment schedule. A tax pot based on those numbers is much more useful than borrowing someone else’s percentage.
