How Much Tax Should a UK Small Business Owner Set Aside?

How much tax should a UK small business owner set aside?

One of the most common questions small business owners ask is, “How much should I put aside for tax?”

The honest answer is that there is no single percentage that suits every business. Your tax depends on your profit, other income, business structure, expenses, VAT position and whether you need to make payments on account.

But you can create a simple routine that makes tax feel far less stressful.

This guide is for UK sole traders, freelancers, consultants, online business owners and service based businesses who want a clearer way to plan for tax.

Start with profit, not the money in your bank account

Tax is usually based on profit, not simply the total amount your business receives.

For a sole trader, profit is broadly your business income less allowable business expenses. Taking money from the business for personal use does not reduce taxable profit.

For example, if your business receives £40,000 and has £10,000 of allowable expenses, your taxable profit is usually £30,000, not £40,000.

HMRC explains how allowable expenses reduce taxable profit and what records self employed people need to keep. Read GOV.UK guidance on self employed expenses and business record keeping.

That is why a healthy bank balance can sometimes be misleading. Some of that money may already be needed for tax, VAT, supplier costs, payroll or upcoming software subscriptions.

A sensible starting point for sole traders

Many sole traders choose to move a percentage of each payment received into a separate tax savings account.

The right percentage depends on your circumstances, but setting money aside regularly is usually easier than trying to find a large amount at the Self Assessment deadline.

Your estimate should allow for Income Tax, Class 4 National Insurance, student loan repayments where relevant, payments on account where relevant and any other personal income that affects your tax position.

For the 2026 to 2027 tax year, self employed people generally pay Class 4 National Insurance at 6% on profits between £12,570 and £50,270, then 2% on profits above that level. Your Income Tax position depends on your total taxable income, so a tailored calculation is more useful than following a generic percentage online. Check the current National Insurance rates on GOV.UK.

Do not forget payments on account

Payments on account catch many business owners by surprise after their first larger Self Assessment bill.

They are advance payments towards your next year’s Income Tax and Class 4 National Insurance. Each payment is usually half of the previous year’s relevant bill.

They are normally due on 31 January and 31 July. On 31 January, you may need to pay both the balancing payment for the tax year just ended and your first payment on account for the following year. GOV.UK explains how payments on account work.

This does not always mean you are paying double tax. It means HMRC is collecting part of the next year’s estimated bill in advance.

A regular tax pot gives you more control over this, especially as the business grows.

Limited company owners need a different approach

If you run a limited company, the company is separate from you personally.

The company pays Corporation Tax on its taxable profits. You may then take money through salary, dividends, repayment of money you lent the company, or another properly recorded route.

This means the tax planning process is different from that of a sole trader. A percentage of sales is rarely enough to tell you what is safe to take personally or what needs to stay in the business.

Before making a payment, it helps to know what profit the company has made so far, what tax and bills are still due, what has already been paid to you, whether the payment has been recorded correctly and what the business needs for the next few months.

That is one reason current bookkeeping is so valuable. It gives you a clearer decision rather than an estimate based on the bank balance alone.

Keep your tax money separate

A separate tax savings account is a simple habit with a big benefit.

When you receive income, transfer your chosen tax amount straight away. You can then see more clearly what is available for business costs, personal drawings, growth and savings.

You do not need a complicated system to start. Review income and expenses each month, check the estimated tax position, move money into your tax savings account, keep a note of expected VAT, Self Assessment and company tax deadlines, then review the percentage again when profit changes.

The important part is consistency. The sooner you build the habit, the less likely tax becomes an unexpected pressure later.

Review your estimate when the business changes

A tax percentage should not stay fixed forever.

Review it if you take on more work, increase your prices, employ someone, register for VAT, start earning from a new income stream, take money from the business differently, move from sole trader to limited company, or have a large change in expenses or profit.

Online business owners can have extra moving parts too, such as payment platform fees, advertising spend, overseas sales, digital services and subscriptions. The clearer your records are, the easier it is to identify what needs attention.

What should you do this month?

If you are not sure how much tax you should be setting aside, start with three questions.

1. Do I know my current profit, not just my bank balance?
2. Do I know whether payments on account apply to me?
3. Do I have a separate place for tax money?

If the answer to any of these is no, it is a good time to review your bookkeeping and tax plan.

BarrettStacey supports UK small business owners who want clearer numbers, organised records and a more confident approach to tax. You can book a discovery call and we will learn about your business before sending a proposal for suitable support.

Frequently asked questions

What percentage should a sole trader set aside for tax?

There is no universal percentage. It depends on taxable profit, other income, expenses, student loan repayments and payments on account. A regular estimate based on current figures is more reliable than using one generic rule.

Is tax based on turnover or profit?

For a sole trader, Income Tax is generally based on taxable profit, not turnover. Allowable business expenses can reduce taxable profit.

Should I keep tax money in a separate bank account?

Many business owners find a separate savings account helpful. It makes money set aside for tax easier to see and less likely to be spent on day to day costs.

Do limited company owners set aside tax in the same way?

No. A limited company is separate from its owner, and its Corporation Tax, salary, dividend and cash flow position need reviewing together.