How much should a sole trader save for tax each month?

Understanding the core question: “How much should I save each month?”

If you’re a sole trader, “how much should I save for tax each month?” is one of the most practical questions you can ask—and one of the easiest to get wrong if you rely on guesswork. The tricky part is that your tax bill isn’t a flat percentage of your sales. It depends on profit (not revenue), personal allowances, tax bands, allowable expenses, whether you also have other income, and what kind of taxes apply to you as a self-employed person. Then there’s the timing: you may earn steadily, seasonally, or in irregular bursts, but tax deadlines don’t care about your cash flow.

The goal of monthly saving isn’t to predict your bill with perfect accuracy. It’s to build a reliable system that keeps you comfortably ahead of your liabilities so you can pay on time without stress, without dipping into rent money, and without needing panic invoices in January. A good monthly tax-saving habit also makes you more confident about reinvesting in your business, because you’ll know what’s truly yours to spend.

This article will walk through a practical way to decide a monthly tax set-aside amount, using a combination of simple rules of thumb and a more accurate method based on your real profit. It will also cover common pitfalls (like forgetting “payments on account”), how to deal with VAT if it applies to you, and how to adjust as your income changes.

Start with the golden rule: save from profit, not from turnover

Sole traders often think in terms of “I earned £X this month,” meaning sales. But tax is calculated on profit: what’s left after allowable business expenses. That means two people with the same turnover can have wildly different tax bills if one has high costs and the other has low costs.

So before you decide how much to save, you need at least a rough idea of your monthly profit. If you don’t have that, begin with a basic tracking habit: record income, record business expenses, and keep those separated from personal spending. Even a simple spreadsheet or a bookkeeping app can make the difference between confident planning and last-minute surprises.

To make this concrete, if you invoice £4,000 in a month but spend £1,500 on allowable business costs (software, materials, insurance, mileage, subcontractors, etc.), your profit for that month is £2,500. Your tax savings should be calculated on the £2,500, not the £4,000.

The simplest starting point: a percentage you save every month

If you want a simple answer you can implement today, use a percentage set-aside rule. The exact percentage depends on your profit level and your personal circumstances, but the principle is straightforward: every time you pay yourself (or every time a client pays you), you siphon off a slice into a separate “tax pot.”

As a broad approach many sole traders use:

Save 20%–30% of profit if your earnings are modest and you’re unlikely to be in higher tax bands.

Save 30%–40% of profit if your profits are higher, you have fewer expenses relative to income, or you want a buffer for surprises.

Save more if VAT applies and you’re collecting VAT on sales (because that VAT is not yours to keep).

These ranges are intentionally conservative. The point is to avoid coming up short. Any “extra” in the tax pot can later become a bonus, a buffer, or a planned investment. Coming up short, on the other hand, usually turns into stress, borrowing, or delayed payments.

A more accurate method: build your monthly set-aside from the taxes that apply

To save the “right” amount, it helps to understand what you’re actually saving for. For many sole traders, the main pieces are:

Income tax on taxable profits.

National Insurance (rules and thresholds can change, but conceptually it’s another charge tied to profits).

Student loan repayments if you’re on a plan that collects via self-assessment.

Payments on account (a cash-flow mechanic that can double the pain if you’re not ready for it).

VAT if registered (collected on behalf of the government, then netted against VAT you can reclaim).

The accurate method is: estimate annual profit, estimate annual liabilities, then divide by 12 (or by the number of months you want to spread it over). The trick is that you can update this estimate every month as your figures become clearer.

Step 1: estimate annual profit (and keep updating it)

You don’t need to wait until year end. You can estimate annual profit by looking at your year-to-date totals and projecting forward. For example:

If you’ve been trading for 4 months and your total profit so far is £10,000, that averages £2,500 per month. A simple projection would estimate £30,000 profit for the year (£2,500 × 12). If your work is seasonal, you can refine this by using last year’s pattern or by forecasting known busy periods.

The key habit is to revise. Your monthly saving amount doesn’t need to be fixed forever. It should respond to what your business is actually doing.

Step 2: estimate your income tax portion

Income tax is usually the biggest part of the bill, but not always. The amount depends on your taxable profit and any allowances available to you, plus any other income you have (employment, property, dividends, etc.).

For planning purposes, many sole traders do a simplified version:

Take projected annual profit, subtract a rough allowance amount if relevant to your situation, then apply an estimated tax rate based on where you think you sit (basic-rate area versus higher-rate area). If you are not sure, use a cautious rate so you don’t under-save.

If you don’t want to deal with allowances and bands at all, you can plan using an “effective tax rate” approach: choose a single percentage that tends to cover your likely tax exposure on average. This is where the 20%–40% range can be useful. It compresses complexity into a manageable habit.

Step 3: include National Insurance in your set-aside

Many sole traders mentally lump National Insurance into “tax” because it comes out of the same self-assessment process. The important point for saving is that it adds to your total bill, and if you forget it, you will under-save.

In practice, NI can feel like a “few extra percent” on profits (depending on thresholds and current rules), and that’s why conservative set-aside percentages work well: they naturally include room for NI.

If you want precision, you can estimate NI separately and add it to your monthly savings target. If you want simplicity, bake it into a slightly higher set-aside percentage.

Step 4: don’t forget student loan repayments

If you have a student loan that is collected via self-assessment, it behaves like an additional percentage of income above a threshold. Sole traders sometimes get caught out by this because they have been used to repayments coming out automatically through PAYE, or they simply haven’t planned for the extra charge.

If this applies to you, your monthly set-aside should include it. The easiest way is to add a buffer percentage. If you already know your plan type and how repayments are calculated, you can estimate it more directly based on projected income.

Step 5: understand “payments on account” (the biggest cash-flow surprise)

For many sole traders, the biggest shock isn’t the size of the tax bill—it’s the timing. “Payments on account” can mean that when you pay your first big bill, you’re also asked to pay an advance amount toward the next year, often in two instalments. If you’re not expecting that, it can feel like your tax doubled overnight.

Here’s the practical takeaway for monthly saving: you may need to save enough not only to cover last year’s liability, but also to fund those advance payments. That’s why many people recommend saving more aggressively in your first year of trading.

One way to handle this is to create two pots:

A current-year tax pot for the tax arising on this year’s profits.

A “payments on account buffer” to help with the transition into the payment schedule if it applies.

If you already know you’re in a payments-on-account situation, the simplest approach is to save an amount that covers your projected annual liability plus a cushion for the instalments, then smooth that across the year.

A practical framework: three tiers of monthly tax saving

Different businesses need different levels of complexity. Here are three tiers you can choose from, depending on how confident you are with your numbers.

Tier 1: the “set it and forget it” rule

This is best if your income is variable and you want a simple habit.

Set aside 30% of your profit each month.

If you’re early in your sole trader journey, 30% of profit is often a comfortable middle ground that covers income tax and NI for many people, with a bit of buffer. If you’re earning more, increase it to 35% or 40% to avoid getting caught out.

Then, once a quarter, do a quick review: compare the tax pot balance to your year-to-date profit and see whether your savings rate still feels right.

Tier 2: the “quarterly check-in” method

This is best if you can do basic bookkeeping and want more confidence.

Each month:

1) Calculate profit for the month (income minus allowable expenses).

2) Transfer a percentage (for example 30%–40%) into the tax pot.

Each quarter:

1) Look at year-to-date profit.

2) Estimate your likely total-year profit.

3) Use that estimate to sanity-check whether your tax pot is on track.

This method gradually gets more accurate through the year, because your projection is based on real numbers instead of guesses.

Tier 3: the “monthly forecast” method

This is best if you want the closest thing to certainty.

Each month, you update a forecast spreadsheet with:

Year-to-date income

Year-to-date allowable expenses

Year-to-date profit

Projected full-year profit

Estimated tax + NI + student loan

Expected payment timetable (including payments on account)

Then you calculate the remaining amount needed in the tax pot and divide it across the remaining months before the payment deadline. This is especially useful if your income is front-loaded or back-loaded across the year.

How to choose the right percentage for you

Percentages are powerful because they scale with your business. But how do you pick the “right” one?

Here are factors that push your set-aside percentage up or down:

Factor 1: how high are your profits likely to be?

As profit increases, you may move into higher effective rates. If you think you’re near a threshold where rates change, choose a higher savings percentage so you don’t end up short.

Factor 2: how clean are your books?

If you’re not tracking expenses consistently, you may be underestimating profit or overestimating it. A higher set-aside percentage buys safety while you improve your records.

Factor 3: do you have other income?

If you also have employment income, your self-employed profit might sit on top of that, which can affect the rate you pay. In that situation, a higher percentage is often sensible.

Factor 4: do you want a buffer?

Even with careful planning, surprises happen: a late expense that turns out not to be allowable, a change in profit, a missed deadline, or an increase in costs. Saving slightly more than needed is rarely a problem; saving too little often is.

Factor 5: are you registered for VAT?

VAT changes the picture because you may be collecting extra money from customers that does not belong to you. If you are VAT registered, you should treat collected VAT as “held on behalf of the government,” not as income. That means your monthly set-asides may need to include a VAT pot as well as a tax pot.

VAT and monthly saving: separate the “tax pot” from the “VAT pot”

If VAT applies to your business, you’ll often be charging customers an extra percentage on top of your prices. That VAT output tax is not profit. It’s money you owe, minus any VAT you reclaim on business purchases (input tax). The net amount is what you pay over to the tax authority, typically on a quarterly schedule depending on your scheme.

A common mistake is to let VAT cash sit in the main bank account. It inflates the balance, makes you feel richer than you are, and then creates a nasty surprise when the VAT return is due.

A better system is:

Transfer VAT collected into a VAT pot as you receive payments (or at least monthly).

Also transfer your income tax/NI savings into a separate tax pot.

This way, your “available to spend” money is much closer to reality, and you won’t accidentally spend what isn’t yours.

When to transfer money: monthly vs per payment

Some sole traders save monthly. Others save each time they get paid. Both can work, but there are differences.

Saving per payment is often more reliable, because it ties the habit to cash coming in. When a client pays, you immediately split the money: business costs, personal spending, and tax. It reduces the risk that you “forget” and spend it.

Saving monthly can work well if you have predictable income or if you do a monthly bookkeeping routine. Choose a fixed day each month to do your calculations and transfers.

If you’re prone to leaving things to the last minute, per-payment saving is usually safer.

What “good” looks like: building a tax system you can trust

A strong sole trader tax-saving system has three features:

Separation: Tax money is kept separate from spending money.

Consistency: You save regularly, not just when you remember.

Adaptability: Your savings rate adjusts as your profit changes.

This can be done with separate bank accounts, separate “pots” within a banking app, or even a spreadsheet plus discipline. The tool matters less than the habit.

How to handle irregular income without overthinking it

Many sole traders don’t earn the same amount each month. Designers, tradespeople, consultants, and freelancers may have feast-or-famine cycles. The good news is that a percentage method naturally handles irregularity, because when you earn more, you save more, and when you earn less, you save less.

The risk is that low-income months tempt you to raid the tax pot. To avoid this, treat the tax pot as untouchable, like money you’re holding for someone else—because you are. If you genuinely need cash flow support, it’s better to plan that by adjusting drawings or setting aside an emergency buffer, rather than borrowing from future tax payments.

Should you save monthly even if you’re making a loss?

If your business makes a loss (allowable expenses exceed income), your income tax on that trade profit may be zero for that period, and you might not need to save for tax on those months. However, you still need to think about cash flow, and you still need to keep records because losses can affect your overall position.

In loss months, the focus usually shifts to:

Keeping business and personal finances cleanly separated

Reducing unnecessary costs

Chasing invoices and improving payment terms

Stabilising income

Once profitability returns, restart the tax-saving habit immediately.

Common mistakes that cause sole traders to under-save

Even smart, organised people get caught out. Here are the most common reasons:

Mistake 1: saving from turnover instead of profit

If you save 30% of revenue while ignoring expenses, you may either wildly over-save (and feel unnecessarily squeezed) or, more dangerously, you may under-save because you’re not tracking expenses properly and your profit is higher than you think.

Mistake 2: forgetting National Insurance or student loan repayments

These can add meaningful amounts to the bill. If you only plan for income tax, you may be short.

Mistake 3: not planning for payments on account

This is the classic “why is my tax bill so high?” moment. The bill can include both the balance due for the year and advance instalments for the next year.

Mistake 4: treating the tax pot as savings you can borrow

Borrowing from the tax pot is like borrowing from your future self at a very inconvenient interest rate: stress and urgency. If you need flexibility, build a separate emergency fund for the business.

Mistake 5: waiting until the end of the year

Tax isn’t a once-a-year problem; it’s a year-round cash-flow reality. Monthly saving turns a scary annual bill into manageable routine.

A simple workflow you can implement this month

If you want a practical routine, here’s an easy one:

1) Create a separate tax account or pot.

Make it harder to spend accidentally.

2) Decide your initial saving rate.

If you’re unsure, start with 30% of profit. If your profits are high or you want extra safety, start with 35%–40%.

3) Do a monthly “money admin” session.

On the same day each month:

Update income and expenses.

Calculate profit.

Transfer your percentage into the tax pot.

Review whether VAT (if relevant) is also being separated.

4) Review quarterly and adjust.

Every three months, compare your tax pot to your year-to-date profit. If the pot feels low, increase your percentage now, not later.

How much should you save if you want to be extra safe?

Some sole traders prefer to “over-save” and then treat any leftover as a bonus after filing. If you like certainty, you can choose a more conservative approach:

Save 40% of profit if you expect higher tax bands, have other income, or simply want maximum protection.

Save 30%–35% of profit if you expect basic-rate tax levels and your books are solid.

Save a little extra in your first year to prepare for payments on account.

This is not about pessimism; it’s about staying in control. You can always reduce the percentage later once your first full tax cycle is complete and you’ve seen your real effective rate.

What to do once you know your actual effective tax rate

After you’ve completed a full year and filed your return, you’ll have a powerful piece of information: your real tax bill relative to your profits. From that, you can calculate an “effective rate” for your situation.

For example, if your total tax and NI liability (and any student loan repayments collected via the same process) came to £9,000 and your taxable profit was £30,000, your effective rate was 30%.

Once you know this, you can set your monthly percentage close to that number, then add a small buffer (for example 2%–5%) to account for profit growth and surprises. This turns tax saving from guesswork into a tailored system.

Planning for the deadlines without panic

Even if you save monthly, it helps to map your tax payment timeline. The purpose of mapping is not to memorise rules; it’s to avoid the situation where a payment date arrives and you realise your “tax pot” isn’t big enough.

A good habit is to have a simple calendar note for the major deadlines and a monthly reminder to review your tax pot balance. If you see a gap early, you can fix it gradually by increasing the monthly transfer, rather than scrambling later.

Should you save weekly instead of monthly?

Weekly saving can be useful if you’re paid frequently, such as in cash-heavy trades or if you have many small client payments. The advantage is that you build the habit more often and reduce the temptation to spend the money.

If weekly saving feels like too much admin, do it monthly. The best system is the one you’ll actually follow consistently.

Final guidance: a clear answer you can act on today

If you’re looking for a straightforward monthly number without building a complex forecast, the most practical answer is:

Save 30% of your monthly profit for tax as a default starting point.

If you’re earning more, have other income, are VAT registered, have student loan repayments, or you want extra security, increase it to 35%–40%. If your business is new and you’re approaching your first big bill, lean higher to avoid being caught out by cash-flow timing.

Then, as your bookkeeping improves and you complete your first tax cycle, refine your saving rate using your actual effective rate from real figures. The goal is not perfection on day one—it’s building a stable habit that keeps you in control, month after month, no matter how your income fluctuates.