How Much to Set Aside for Tax as a Self-Employed Person

The Problem with Guessing

Many new freelancers either set aside too little (and face a stressful January tax bill) or too much (tying up money that could be working for them). Getting the percentage right means you're always prepared without unnecessarily hoarding cash.

The Quick-Start Rule: 25–30%

For most UK freelancers earning between £20,000 and £50,000 in profit, setting aside 25–30% of every payment is a reliable rule of thumb. This covers:

• Income Tax (20% basic rate on profits above the Personal Allowance)
• Class 4 National Insurance (9% on profits above £12,570)
• A small buffer for unexpected adjustments

If you save 25% on every payment received and end up with slightly more than needed, that's a bonus — not a problem.

Adjust Based on Your Profit Level

The right percentage varies significantly by income:

• Under £12,570: Below the Personal Allowance — you may owe very little tax, but still check NI thresholds. Save 5–10% as a buffer.
• £12,571 – £30,000: Basic rate taxpayer with relatively low NI. Save 20–25%.
• £30,001 – £50,270: Still basic rate, but NI becomes more significant. Save 25–30%.
• £50,271 – £100,000: Higher rate taxpayer. Save 35–40%. Income Tax jumps to 40% on this slice.
• Over £100,000: Additional complexity (Personal Allowance taper). Consider speaking with an accountant and saving 45%+.

Don't Forget Payments on Account

HMRC requires advance payments towards next year's tax bill. If your January bill is £5,000, you'll also make a first payment on account of £2,500 in January and another £2,500 in July. In your first year of self-employment, these payments on account can come as a shock — your savings buffer needs to cover them.

A Practical System That Works

The simplest approach is to open a separate savings account dedicated to tax. Every time a client pays you, immediately transfer the appropriate percentage into that account. Treat it as money that was never yours to spend.

Some freelancers go further and also set aside a pension contribution (5–10%) and a business buffer (10%) from each payment, leaving a clearly defined "safe to spend" figure.

Expenses Reduce Your Tax Bill

Remember that allowable business expenses reduce your taxable profit, which reduces your tax bill. If you're saving 27% of gross receipts but your expenses bring your profit down significantly, you'll have more than you need at tax time. This is a good problem to have.

Using Software to Automate This

Manually calculating percentages for every invoice quickly becomes tedious. Tools like Beancountr track your income and expenses in real time, calculate your running tax reserve automatically, and always show you exactly how much is set aside. No spreadsheets, no guessing.