What you're actually paying
When you're self-employed, your tax bill has three components. Understanding each one helps explain why the percentage feels higher than employees expect:
- Income Tax. At the basic rate, this is 20% on profits above your personal allowance (£12,570 in 2025–26). If your profits exceed £50,270, the rate rises to 40% on the excess.
- Class 4 National Insurance Contributions. This is 6% on profits between £12,570 and £50,270, and 2% above that. It's calculated on the same profit figure as Income Tax.
- Class 2 National Insurance Contributions. A flat-rate charge (£3.45 per week in 2025–26) if your profits exceed the Small Profits Threshold. It's collected as a lump sum through your Self Assessment bill and qualifies you for the State Pension.
Add those together for a basic-rate taxpayer and the combined rate on profits between £12,570 and £50,270 is roughly 26%. Factor in the Class 2 flat charge and a small buffer for any miscalculations, and setting aside 25% of your profit is a reliable starting point for most people.
If your profits are likely to push you into the higher-rate band, save 30% instead.
The basic calculation
The formula is intentionally simple:
Estimated profit × 25% = monthly tax pot
Every time money comes in, move 25% of it into a dedicated savings account. Don't touch it. When the bill arrives in January, the money is already there. This approach handles Income Tax, both classes of NI, and leaves a small buffer for underpayments.
If you have a Personal Allowance available and your profits are relatively modest, your effective rate will be lower than 25% — meaning you'll likely have some surplus in the pot at the end. That's a better outcome than a shortfall.
A worked example
Suppose you're a sole trader with £30,000 in profit in a tax year (after allowable expenses), no other income, and you're using the full personal allowance.
That's about 15.7% of the £30,000 profit. Setting aside 25% would have generated a pot of £7,500 — leaving you with roughly £2,789 surplus after the bill is paid. Many people use that surplus to cover their payments on account (see below) or as the start of next year's tax pot.
Where to keep it
Open a separate easy-access savings account — not your current account — and treat that money as already spent. Keeping it physically separate from your operating funds removes the temptation to use it and makes it much easier to see at a glance whether you're on track.
Many banks now offer instant business savings accounts with no notice period. Even a personal easy-access account works fine for sole traders. The small amount of interest it earns is a bonus, though if interest takes you above your Personal Savings Allowance you'll need to declare it on your return.
Payments on account — what they are and why they catch people off guard
Once your Self Assessment bill exceeds £1,000, HMRC requires you to make payments on account towards the following year's bill. These are two advance payments, each equal to half your previous year's bill, due on 31 January and 31 July.
In your first year of filing, this means the January deadline includes not just your tax for the year just ended, but also the first payment on account for the year in progress. Effectively you pay 150% of a year's bill in one go.
Example: Your first Self Assessment bill is £4,711. On 31 January you pay £4,711 plus a first payment on account of £2,355 — a total of £7,066. Then on 31 July you pay a second payment on account of £2,355.
If you've been saving 25% throughout the year, the pot will typically cover the full January amount including the payment on account. If you haven't been saving, this is when people get into trouble.
The one thing that changes everything
Every allowable expense you claim reduces your taxable profit by a pound. That means less Income Tax and less Class 4 NI — not just a minor rounding, but a meaningful reduction in the bill you're saving towards.
If you claim an additional £2,000 in legitimate expenses, a basic-rate taxpayer saves roughly £520 in tax (26p per pound). Over a full year, thorough record-keeping and a complete expenses claim can easily reduce a tax bill by several hundred pounds.
The 25% rule is a safe buffer — but the more diligently you track expenses, the less of that buffer you'll actually need to use. The full guide covers which expenses to claim, how to calculate your profit correctly, and how to file your return without leaving money on the table.