How much should you put aside for tax?

Last Updated on 8 December 2023

sole trader

If you’re new to being a sole trader (ie registered as self-employed), it can be a bit daunting that people pay you without making any deductions for tax and National Insurance (NI).

You know you need to pay tax later, but how much do you put aside?

What’s your tax band?

The answer depends partly on how much you will earn overall through the tax year.

If you are a 20% tax payer, like 85% of earners in the UK, it should be enough to put aside 20%-25% of whatever you receive from your clients.

Q: But wait!! If tax is 20% and National Insurance is roughly 12%, surely we should put aside 32%?

A: Not quite. The first £12,570 of your profits will not be taxed (2023-24 figures). And if you have business costs, the amount you’ll be taxed on will go down.

When 20%-25% is not enough

Savings bank

Don’t forget that if you have profits over £50,270, or £43,663 if you live in Scotland, you will be paying double the basic rate of income tax on anything over that threshold. (Bizarrely National Insurance goes down to 2% from that point.)

With those levels of taxable profit you probably need to put aside 35% to make sure you cover your tax and NI bill.

If you’re lucky enough to have profits over £100,000 in the year, start putting away 45% of whatever you earn.

Putting aside enough tax. A graphic showing the rates

Big disclaimer

These figures are very very rough, and a lot will depend on your personal circumstances. But the logic still holds, even if your figures will be different.

Main message

If you receive any income that’s not yet been taxed, be self-disciplined. Put some aside as a matter of habit. You’re not quite as rich as you feel!

Are you also VAT registered?

Having turnover over £85,000 in any 12-month period means you’ll also have to be VAT registered. You can even be registered voluntarily below that turnover.

If you are VAT-registered, you need to make sure you also put aside all the VAT you collect from your clients, so that you can pass this to tax office every quarter. This is separate from your income tax and NI bill.

For most people this means squirrelling away a further 20% from whatever you are paid, just for the VAT element.

Please note:

Although every effort has been made to provide accurate tips and information, David Thomas Media Ltd accepts no responsibility for any errors, omissions or out-of-date facts. Trainees are advised to seek up-to-date professional advice on all financial and tax matters before making decisions relating to these subjects. Nothing in our notes, courses, webinars, downloads or social media should be considered as financial advice.
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Posted on 02 October 2023

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