How to Save for Your Tax Bill UK 2026 — A Cash-Flow Guide for Trades

The One Habit That Solves It: A Separate Tax Account

The single most important thing you can do is open a second bank account purely for tax, and move a slice of every payment into it the moment a customer pays you. Treat that account as if the money isn't yours — because it isn't. It belongs to HMRC; you're just holding it for them.

The psychology matters. When the tax money sits in your main current account, it feels like working capital. You see a buffer, you take on a bigger van lease, you under-quote the next job because you think you've got headroom. Sweep it into a separate pot the day it arrives and you remove the temptation entirely. Most business banking apps let you open multiple accounts or "spaces" in minutes, and many pay interest — so your tax savings can earn a little while they wait.

The rule is: every time you get paid, transfer a fixed percentage into the tax account before you do anything else. Not at month end. Not when you remember. The same day.

What Percentage Should You Set Aside?

This is the question everyone asks, and the honest answer is "it depends" — but there are solid rules of thumb. For a sole trader, your tax bill is made up of Income Tax plus National Insurance, both charged on your profit (income minus allowable expenses), not your turnover.

For 2025/26, the personal allowance is £12,570 — profit below that is tax-free. Profit above it up to £50,270 is taxed at the basic rate of 20%. On top of that, the self-employed pay Class 4 NIC at 6% on profit between £12,570 and £50,270, and 2% above that. Class 2 NIC is no longer a flat weekly charge for most — it's treated as paid where profits are above the small profits threshold — but the principle of budgeting for NIC still holds.

Because the personal allowance shelters the first chunk of profit, a basic-rate sole trader rarely pays a full 26% on their whole income. Setting aside 20–30% of your profit comfortably covers Income Tax and Class 4 NIC for most basic-rate trades. If your profit pushes you into the higher-rate band (over £50,270), the marginal rate jumps to 40% Income Tax plus 2% NIC — so higher earners should set aside 40% or more on the profit above the threshold.

A Simple Worked Example

Say you're a self-employed carpenter and after expenses your profit for the year is £45,000. Here's roughly how it breaks down:

• First £12,570 — tax-free (personal allowance)
• £12,570 to £45,000 = £32,430 taxed at 20% = £6,486 Income Tax
• Class 4 NIC at 6% on that same £32,430 = £1,946
• Total bill: roughly £8,432

That's about 19% of your £45,000 profit. Set aside 25% and you've got a healthy cushion — which you'll want, because of Payments on Account (more on that below). If you don't track expenses carefully and your "profit" is closer to your turnover, you'll want to lean toward the higher end of the range.

If You're VAT-Registered: That VAT Is Not Your Money

Once your turnover passes the VAT threshold (£90,000 for 2025/26) you must register, and from that point the 20% VAT you add to invoices is collected on HMRC's behalf. It lands in your bank account, but it was never yours to spend.

This catches out more trades than almost anything else. A £6,000 job becomes a £7,200 invoice — and that extra £1,200 feels like a bonus until the quarterly VAT return is due. The discipline is the same as for Income Tax: sweep the VAT element of every invoice into a separate pot the moment you're paid. You'll reclaim VAT on your own purchases, so what you actually owe each quarter is the VAT you charged minus the VAT you paid out — but setting aside the full VAT charged keeps you safe and means a quarterly surplus rather than a shortfall.

All the Bills You're Actually Planning For

"Tax" isn't one bill — it's several, depending on how you trade. Know which apply to you so nothing arrives as a surprise.

• Income Tax: charged on your profit through Self Assessment, due 31 January.
• Class 2 & Class 4 NIC: National Insurance for the self-employed, collected alongside Income Tax in your Self Assessment.
• Payments on Account: the one that catches everyone out — see below.
• VAT: quarterly returns and payments if you're registered, usually due one month and seven days after the quarter end.
• CIS deductions: if you're a subcontractor, contractors deduct tax at source — so you may be owed a refund rather than facing a bill (see below).
• Corporation Tax: if you run a limited company, charged on company profits (19% small-profits rate, up to 25% on higher profits) and due nine months and one day after your year end.
• Dividend tax: if you take dividends from your limited company, you pay personal tax on them above the small dividend allowance — budget for this separately from the company's Corporation Tax.

Payments on Account — the First-Year Double Hit

This is where new sole traders get burned. Once your Self Assessment bill is over £1,000, HMRC asks you to pre-pay next year's tax in two instalments called Payments on Account, each equal to half of last year's bill. They're due 31 January and 31 July.

In your first year of trading this means a brutal January: you pay the balancing payment for the year just gone, plus the first Payment on Account for the year ahead — at once. On our £45,000 example, that's roughly the £8,432 owed for the year, plus another £4,216 on account, totalling around £12,648 in one go. Then a further £4,216 follows in July. If you've only saved for the first number, you're in trouble. Saving 25–30% from day one is what gets you through this.

CIS Subcontractors — You Might Be Owed a Refund

If you work under the Construction Industry Scheme as a subcontractor, the contractor who pays you deducts 20% (or 30% if you're not registered) before you ever see the money, and hands it to HMRC. That deduction is an advance payment toward your Income Tax and NIC.

Because tax has already been taken at source, many CIS subbies find that when they file their Self Assessment, the deductions exceed what they actually owe — especially once expenses (tools, materials, mileage) are claimed. The result is a refund, not a bill. If that's you, your tax-saving discipline shifts: you're less likely to owe a lump sum, but you must still file accurately and keep records to claim back what you're due. Don't assume a refund is guaranteed, though — if you also have un-deducted income, you can still owe.

Practical Systems That Make It Automatic

Knowing the percentages is useless without a system to act on them. Here's what works for busy trades who don't want to think about it.

• A tax pot or second account: the foundation. Money you've swept here is out of sight and out of mind. Some banks let you create sub-accounts ("pots" or "spaces") inside your main business account for free.
• Automate the transfers: if your income is fairly regular, set a standing order. If it's lumpy, build the habit of moving a percentage every time a payment clears — some banking apps can auto-sweep a set percentage of incoming payments.
• Use a percentage rule: pick your number (say 25% of everything received, or the VAT element plus 25% of the rest if VAT-registered) and apply it without exception.
• A simple spreadsheet: one row per invoice, columns for net, VAT, and tax set aside. Even a basic sheet beats guesswork and lets you see your real position at a glance.
• Good bookkeeping software: tools that track income and expenses in real time can estimate your tax liability as you go, flag VAT due, and — under Making Tax Digital — keep you compliant with quarterly digital records. Knowing your estimated bill in October means no January panic.
• HMRC's Budget Payment Plan: an underused option that lets you pre-pay your Self Assessment by weekly or monthly Direct Debit. You choose the amount, build up a credit with HMRC through the year, and it's offset against your bill. It only works if your payments are up to date, but it's a brilliant way to make tax feel like a regular outgoing rather than an annual shock.

If you do fall behind despite all this, HMRC's Time to Pay arrangement lets you spread a bill you can't meet over instalments. Treat it as a genuine fallback, not a plan — interest applies, and it's far better to have the money saved than to be negotiating with HMRC.

Quick Reference: Roughly How Much to Set Aside

These are rules of thumb to keep you safe, not exact calculations. Your real liability depends on your full income, allowances and expenses — confirm the precise figures with your accountant.

Key Dates to Plan Around

Put these in your calendar with a reminder a month ahead, so you can check your tax pot has enough in it before each deadline.

• 31 January: Self Assessment balancing payment for the previous tax year, plus your first Payment on Account. Also the online filing deadline.
• 31 July: second Payment on Account toward the current year.
• VAT quarters: if registered, returns and payments are usually due one month and seven days after each quarter end (your exact quarter dates are set when you register).
• Corporation Tax: due nine months and one day after your company's accounting year end.

Know Your Numbers, Not Just Your Tax

Saving for tax is really a margins problem in disguise. The trades who never get caught short are the ones who know their real profit on every job — which means tracking what each customer costs to win and what they actually pay. When you can see that the jobs from one marketing channel come in at a healthy margin and another barely breaks even, you make better decisions all year, and your tax bill stops being a guessing game. Trade2Base helps trades track which marketing brings in paid work and what their real margins are, so the money you set aside for tax is based on numbers you trust.