The short answer set aside from 20 to 25% of profit if you are a basic sole trader, if you are landlord the profit is 25 to 40% and if you run a limited company profit will be 20 to 30%, plus personal tax dividends. But percentage is not the issues, the real problem is timing and behaviour. Most tax bills are not surprising because they are large, they are surprising because the cash was never set aside in the first place.
In 2026, approximately 1 million self assessment tax payers missed the 31 January deadline for the tax year 2024/25, according to HMRC. This continues the trend from January 2024, when around 1.1 million taxpayers missed the filing deadlines for the 2022/2023 tax year. Late payment penalties remain one of the most common and avoidable financial stress for small business owner and the self-employed. In 2023 simply Business survey found that 1 in 3 self-employed people had an unexpected tax bill in the previous year with the average bill exceeding £ 5,000. With missed deadlines continuing to rise, this guide shows you how to make sure you are never in that
Key Takeaways
- Tax is a delayed consequence, not a surprise, every profit you make today creates a future liability.
- Your bank balance is not your money it contains VAT collected, Corporation Tax building up, and Income Tax due later.
- Sole traders should set aside 20–25% (basic rate) up to 40–45% (additional rate) of profit.
- Landlords should provision 25–40% of taxable profit not cash surplus, because Section 24 mortgage interest restrictions inflate the tax bill.
- Limited company directors need to plan for Corporation Tax on profits and personal tax on dividends separately.
- Payments on account can double your January bill: HMRC wants last year’s tax plus 50% towards next year.
- VAT is never your money, treat it as untouchable from day one.
- The fix is a system, not a spreadsheet: a separate tax account, monthly transfers, and a quarterly review.
Start with the Right Principle
Tax is not a surprise, but making it delay might have consequence.
If you are:
- Making profits
- Taking income
- Or generating gains
You are creating a future tax bill, the only variable is whether you deal with it gradually or all at once.
How Much Tax Should I Put Aside?
Use this table as your starting reference point. Your exact liability will depend on your full income picture, allowable expenses, and personal circumstances but these ranges give you a safe working estimate.
UK Tax Money You Should Set Aside
| Type of taxpayer | Income level | Save for tax | Simple meaning |
|---|---|---|---|
| Sole trader / self-employed | Up to ~£50,000 profit | 20–25% | Basic tax + National Insurance |
| Sole trader / self-employed | £50,001–£125,140 | 30–40% | Higher tax band + National Insurance |
| Sole trader / self-employed | Above £125,140 | 40–45% | Highest tax band, no tax-free allowance |
| Limited company director | Salary (PAYE) | Already handled | Tax taken before you get paid |
| Limited company director | Dividends | 8.75%–39.35% | Depends on total income level |
| Limited company | Company profit | 19–25% | Corporation Tax on business profit |
| Landlord | Rental profit | 25–45% | Tax can be higher because mortgage relief is limited |
| VAT-registered business | VAT collected | 100% | Keep aside, it belongs to HMRC |
Source: HMRC Income Tax rates and Personal Allowances , Corporation Tax rates , Tax on dividends .
Why People Get This Wrong
1. Confusing Cash with Profit
“I have got money in the bank, so I must be fine” is not always true. Your bank balance is usually a mix of your own money, tax that still belongs to HMRC, and timing differences between when income is received and when expenses or taxes are actually paid.
- VAT collected but not yet paid
- Corporation Tax building up quietly
- Income Tax due months later
- Payments on account looming
For more on how HMRC defines business profit, see HMRC’s Business Income Manual (BIM).
2. Ignoring the Time Lag
The UK tax system is not real-time. You can earn income today and not pay tax for up to 22 months in some circumstances. That delay creates a false sense of security until January arrives with a full year’s tax bill plus a payment on account for the following year.
3. Not Knowing What ‘Profit’ Actually Means
Especially for sole traders, landlords, and small limited companies: profit is a tax calculation, not what is left after bills or what you have withdrawn. That calculation often differs significantly from your day-to-day cash view.
The System That Prevents Problems
1. Separate the Money
Open a second bank account and label it clearly: Tax Account. Keep it out of sight and out of mind.
2. Move Money Monthly
Every month, estimate your profit and transfer your tax percentage. No negotiation, no ‘I will catch up later’.
3. Treat It as Gone
That money belongs to HMRC. You are simply holding it temporarily. It is not spare cash, it is not a buffer, and it is not available.
4. Adjust Quarterly
Review your profits, costs, and one-off items every quarter and adjust your monthly contribution accordingly. Reality changes; your provision should too.
The Bit That Catches People Out: Payments on Account
- If you are self-employed or a landlord, HMRC does not just want last year’s tax. They want a deposit towards next year.
- Your January Self Assessment bill may include:
- Full Income Tax for the previous tax year
- A payment on account of 50% towards the current year
- That can effectively double the payment. It is not a mistake it is how the system works. You can find full details on the GOV.UK guidance.
What About VAT?
- If you are VAT-registered, the VAT you collect is never your money at any point. Best practice:
- Treat VAT as completely separate from day one
- Move it out of your main account on the day it is collected, or at least weekly
- Otherwise, you will spend it. Everyone thinks they will not. The statistics suggest otherwise.
What This Looks Like in Practice
- A business owner turning over £300,000 might:
- Generate £100,000 profit
- Owe £30,000–£40,000 in tax
- Without a plan, that is a January crisis. With a plan, it is £2,500–£3,500 quietly set aside each month. Same tax. Very different experience.
The Real Issue isn’t Tax – It’s Behaviour
Most tax problems are behavioural rather than technical because people often delay, assume things will work out, hope for the best, or avoid looking at the numbers. Dealing with tax early can feel like losing money, but in reality, you are not losing anything new, you are simply recognising a cost that already exists and making sure it is planned for properly.
The Bigger Question
The real question is not just ‘How much tax should I put aside?’ It is ‘Can my business support the tax it is creating?’
- If setting aside tax feels painful, it may signal:
- Margins are too tight
- Drawings are too high
- Pricing is off
- Or the business structure is wrong
- Tax does not create the problem. It exposes it.
What this means for You
If you want to avoid the usual tax shock, don’t rely on your bank balance to judge how well you’re doing. Instead, set money aside for tax every month rather than waiting until the year-end, and make sure you understand your real profit properly after all expenses.
Also, remember to plan for payments on account and always treat VAT as money that isn’t yours. These small habits are simple, but they can make a big difference in keeping your finances stable and stress-free.
Conclusion
Tax only feels like a shock when it is left too late and not planned for during the year. When it is managed properly, it becomes predictable, easier to handle, and covered through regular set asides and clear tracking of income, expenses, and obligations as they arise throughout the year.
The aim isn’t to reduce tax at any cost, but to ensure the correct amount is paid without stress or last-minute pressure. If you want clarity on your position, Cater Collins Myer can review your structure, estimate set asides, and help you stay fully in control throughout the year with confidence.