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Key takeaways

• How much of your income you must save to pay tax depends on your tax band 

• Limited companies pay corporation tax, while sole traders pay income tax and NI

• Self-employed basic rate taxpayers should save 20-25% of their income; higher rate taxpayers should save around 35%; and top rate taxpayers should save 45%

How much should I put aside for taxes?

Whether you’re a freelance sole trader or a director of a limited company, paying tax and National Insurance (NI) is your responsibility.

Most of us only start paying income tax once our income – or profit – exceeds the annual Personal Allowance of £12,570 (2024-25 tax year).

After that, the amount of business tax you pay depends on your status – sole trader or limited company director – as well as your tax band.

An accountant can advise you how to lower your bill by making the most of business tax relief.

What’s your tax band?

As a self-employed worker, your income determines your tax band:

• Basic rate: 20% on earnings between £12,570 and £50,270

• Higher rate: 40% on earnings between £50,271 and £125,140

• Additional rate: 45% on earnings above £125,140, at which level you also receive no Personal Allowance

You must also pay NI at a rate of up to 6%.

How to save for tax as a sole trader

As a sole trader, you can generally earn up to £12,570 before you have to pay income tax.

Once your profits exceed that amount, you should put aside 20% to 25% of your net profits each month to cover your income tax and NI bill.

If you’re in your first year of trading, bear in mind that HMRC operates a “payments on account” system. 

If you owe more than £1,000 in tax, you must therefore also pay a percentage of your predicted tax bill for the following year “on account”.

How to save for tax as a limited company director

As a director of a limited company, you must pay corporation tax on the company’s profits, as well as income tax on your personal income.

The rate at which you pay corporation tax depends on the level of your profits. 

Companies with taxable profits of £250,000 or more pay 25%. 

Small businesses with taxable profits of up to £50,000 pay 19%. Those in between pay a tapered rate of between 19% and 25%.

You can find out what level of corporation tax you can expect to pay using HMRC’s handy .

Once you know your corporation tax rate, the easiest way to ensure you can cover your bill is to transfer that percentage of your monthly net profits into a business savings account every month.

When it comes to income from the company, you get a tax-free dividend allowance of £500. 

Above this amount you must pay tax at between 8.75% and 39.35%, depending how much you take out.

What about VAT?

You must be VAT registered if your annual turnover is £90,000 or more. 

If this is the case – or you choose to be VAT registered with a lower turnover – you must pay VAT on top of income tax, NI and (for limited companies) corporation tax. 

As VAT is charged at 20%, the rule of thumb here is to put aside a further 20% of the money made from any sales of invoice payments.

This should more than cover what you owe in VAT each quarter, especially as VAT-inclusive purchases can be offset against your VAT bill.

What’s the best way to save for an annual tax bill?

The best place to keep annual tax savings is in a business savings account that pays a competitive rate of interest. 

When choosing an account check you can make a penalty-free withdrawal when you need to pay your tax bill.