How much money should you put away each month to cover your annual tax bill?

Receiving a big tax bill that you cannot afford to pay is one of the scariest things a sole trader can experience. The anxiety it causes can give you many sleepless nights, yet it remains a common scenario.

The best way to avoid it, of course, is to put away enough money each week or month, so you get peace of mind from knowing you can pay your tax bill when required. So, how much should you put away?

Payments on account for sole traders

Intended to save sole traders from tax bills they can’t pay, “payments on account” are advance payments towards your next tax bill, including your National Insurance contributions (NICs).

• You must make two payments on account every year (unless your last Self Assessment tax bill was below £1,000 or you paid more than 80% of the previous year’s tax you owed).
• Each payment is half your previous year’s tax bill. Payments are usually payable by midnight on 31 January and 31 July.

If you still owe tax after you’ve made your payments on account, you must make a balancing payment by midnight on 31 January next year.

Need to know! Payments on account do not include tax you owe for capital gains or student loan repayments, which are payable via your balancing payment.

How much tax do sole traders pay?

• Sole traders get a tax-free Personal Allowance of £12,570 a year. No Income Tax is payable until your business income is more than this.
• The Personal Allowance falls by £1 for every £2 that your adjusted net income is above £100,000. So, you don’t get any Personal Allowance if you earn more than £125,140 a year.
• If you don’t claim allowable expenses (ie tax expenses for things you buy for your business), you can also claim the Trading Allowance, which is a further £1,000 tax-free allowance.
• Sole traders with taxable profits of £12,571-£50,270 pay 20% Income Tax (the basic rate); those with £50,271-£125,140 profits pay 40% (the higher rate); and those with profits of more than £125,140 pay 45% (the additional rate).
• Sole traders pay Class 4 NICs of 6% on profits between £12,570 and £50,270, with 2% payable on profits over £50,270 (*2024/25 tax year for all figures). 

How much should I put aside to pay my tax as a sole trader?

Sole traders are taxed on their profits. So, the more profitable your sole trader business, the higher your tax bill (and the more you’ll have to put away).

• To cover your Income Tax and NICs, if you expect to earn up to £50,000 a year, putting away 15%-20% of your total income each month is advised.
• If you expect to earn between £50,271 and £125,140, put away 35%-40% to cover your tax bill. If you expect to earn more than £125,140 a year, putting away 40%-45% will cover your tax bill.

If there is any money left over once you’ve paid your tax, you can either take it out for yourself or leave it in your business.

Need to know! Paying your tax money into a separate bank account is advisable, because you need to avoid using it, otherwise you risk not being able to pay your tax bill.

HMRC online self-employed ready reckoner tax tool 

If you want a more precise figure, HMRC has created an online self-employed ready reckoner to help you better budget for paying your Self Assessment tax bill. You enter your estimated weekly or monthly profit to get a rough idea of how much Income Tax and NICs you’re likely to have to pay.

Examples

• If your estimated monthly profit is £1,500, you’re advised to put away £153.54 a month.
• If your estimated monthly profit is £2,000, you’re advised to put away £302.19 a month.
• If your estimated monthly profit is £2,500, you’re advised to put away £450.84 a month.
• If your estimated monthly profit is £3,000, you’re advised to put away £599.49 a month.
• If your estimated monthly profit is £5,000, you’re advised to put away £1,299.49 a month.   

Need to know! The tool assumes that you have no other taxable income and that you receive the standard Personal Allowance. The calculation does not include unpaid tax from previous tax bills.

Pay weekly or monthly towards your Self Assessment tax bill?

Alternatively, you could set up a Budget Payment Plan, allowing you to make regular monthly or weekly payments to HMRC towards your next tax bill. A word of warning: you’ll need to make up the difference if the amount you’ve contributed doesn’t cover your next tax bill. However, if there’s a surplus, you can ask for a refund.

When you set up your Budget Payment Plan, you choose how much you want to pay and how often. If necessary, you can pause payments for up to six months, for example, if your work dried up or you had to take time off through illness. To use the Budget Payment Plan, your previous Self Assessment tax payments must be up to date.

To create your Budget Payment Plan, you set up a Direct Debit via your HMRC online account. You choose the Budget Payment Plan option and you’ll be given instructions to help you set up your plan. You’ll need to enter an 11-character payment reference, which is your 10-digit Unique Taxpayer Reference (UTR) followed by the letter K.

What if you can’t afford to pay your tax bill?

If you haven’t set aside enough money and you don’t have enough to pay your tax bill, you need to act. To find out what to do read our guide – “What if you can’t pay your Self Assessment tax bill?”

Get help from GoSimpleTax

Self Assessment filing software GoSimpleTax can enable you to keep track of how much tax you owe, so that you can better budget for paying your tax bill. And we may be able to identify additional expenses that you can claim to reduce your tax bill. GoSimpleTax comes with support from a highly experienced team of tax experts who are there to make filling and filing your Self Assessment tax return much easier. Start your free trial today.

Blog content is for information purposes and over time may become outdated, although we do strive to keep it current. It's written to help you understand your Tax's and is not to be relied upon as professional accounting, tax and legal advice due to differences in everyone's circumstances. For additional help please contact our support team or HMRC.