How much tax to set aside, and the January surprise

Set aside on profit, not on turnover

Tax is charged on profit, which is what you invoiced minus what it cost you to earn it: materials, fuel, tools, insurance, phone, the accountant, the use of a room at home. A trade that turned over £70,000 and spent £30,000 getting there is taxed on £40,000.

That sounds obvious written down and it is the single most common mistake in the first year, because the bank balance looks like turnover and nothing on it says which part was never yours. The habit that fixes it is to take your percentage off every payment as it lands, not to look at a balance once a month and guess.

For 2026/27 the first £12,570 of profit is covered by the personal allowance and carries no income tax, then 20% applies up to £50,270. Class 4 NI runs on a similar band, 6% between £12,570 and £50,270, and 2% above that.

The percentage, worked through

Take £40,000 of profit in 2026/27. The personal allowance covers the first £12,570, leaving £27,430 taxed at 20%, which is £5,486. Class 4 NI at 6% on the same band adds about £1,646. The bill is roughly £7,130, which is under 18% of the profit.

So why does everyone say a quarter to a third? Because the average rate is not the rate that matters. Every extra pound you earn up to the higher rate threshold is taxed at 26%, a good year pushes some of your profit into the 40% band, and the personal allowance has been frozen until 5 April 2031, so the share of your profit that is taxable creeps up every year you earn more.

A workable rule for a sole trader whose profit sits comfortably under £50,270: put 26% of every payment aside, treat anything left over at the end as the buffer for the next year rather than a bonus, and reset the percentage the year your profit changes shape.

If you are in Scotland the income tax bands are different and the rates are set separately, so the same arithmetic runs on different numbers. National Insurance is the same everywhere.

The January that is half as big again

Payments on account are the part nobody explains until it is due. Once your bill is over £1,000, HMRC starts collecting next year's tax in two instalments, 50% each, on 31 January and 31 July, based on what you owed last year.

So the first January is not one bill, it is one and a half. On that £7,130 example you pay the £7,130 you owe for the year just finished, plus £3,565 as the first payment on account for the year you are in, which is £10,695 in one go. Another £3,565 follows in 31 July.

It is not extra tax. It is the same tax, collected earlier, and once you are in the rhythm each January is roughly a year's worth again. The damage is done in the transition, and it is done to people who saved exactly the right amount for the year they had just finished.

There are two ways out and both are worth knowing. If last year's bill came to less than £1,000, no payments on account are due. And if at least 80% of last year's tax was already deducted at source, you are outside the regime as well. That second one is not a footnote in this trade, as the next section explains.

CIS changes the arithmetic

A subcontractor paid under the Construction Industry Scheme has already had 20% of their labour taken off and paid to HMRC before the money arrived. That is tax deducted at source, and it counts against the bill.

Which produces two effects worth planning around. Your set-aside out of subcontract income should be smaller, because a chunk of the tax has already gone, and many subcontractors are owed a refund rather than facing a bill at all. And because those deductions can easily be more than 80% of your total tax, a CIS subcontractor is often outside payments on account entirely.

The trap is the mixed year. Half your income under deduction and half from homeowners who pay in full means the deductions cover only part of the bill, and the part that is not covered is the part nobody set aside. If your work is split, run the percentage on the direct work as though CIS did not exist and treat any refund as a bonus.

Where the money should sit

In a separate account, moved the day the payment lands, calculated as a percentage of that payment. Every part of that sentence is doing work: a separate account because money in the current account is spent, the same day because a weekly review never happens in a busy month, and per payment because it scales automatically when you have a good quarter.

A second account for VAT if you are registered, because that money was never yours for a second and a quarterly VAT bill paid out of the tax pot is how a good year turns into a bad January.

Interest on the balance is a small consolation, and a savings account you have to wait days to access is a feature rather than a problem. The goal is that the January bill is boring.

If it is not there

It happens, and the worst response is silence. HMRC operates Time to Pay arrangements that spread a Self Assessment bill over monthly instalments, and you can often set one up online for a modest debt or over the phone otherwise.

Interest runs on late tax and there are penalties for filing and paying late, so the cost of arranging something is always lower than the cost of hoping. File the return on time even if you cannot pay the bill on time: they are separate obligations, and filing is what tells you the number you need to negotiate about.

Then fix the cause rather than the incident. A missed tax bill is usually a symptom of money arriving late rather than of tax being high, which is the part of this that a payment ladder, deposits and stage payments actually solve.