How Can I Set Aside Money for My Tax Bill Each Month?

At Towerstone Accountants we provide specialist personal tax services, for self employed, and individuals across the UK. This article has been written to explain How can I set aside money for my tax bill each month, in clear practical terms, so you understand how personal tax and Self Assessment rules apply in real situations. Our aim is to help you stay compliant, avoid costly mistakes, and make confident tax decisions.

One of the biggest sources of stress I see around tax is not the calculation itself but the moment the bill arrives. For many people the tax is technically affordable but it does not feel that way because the money has already been spent. By the time January comes around the bill feels unexpected even though it should not have been.

In my experience this problem has very little to do with tax rates and far more to do with planning. People are not failing because they earn too little. They struggle because tax is treated as something to deal with later rather than something to manage gradually throughout the year.

In this article I want to explain how to set aside money for your tax bill in a calm structured and realistic way. I will talk through what actually needs to be saved how to estimate it properly and how to build a system that works month after month without feeling restrictive. This is based on what I see working in real life for sole traders landlords and company directors across the UK.

The goal is not perfection. The goal is control.

Why Monthly Tax Planning Matters

Tax is one of the few large expenses that builds quietly in the background. Unlike rent or utilities there is no monthly invoice reminding you what is due. That silence is exactly why it catches people out.

When tax is ignored during the year the bill arrives all at once. It lands at the worst possible time just after Christmas when cash flow is already stretched. I see people panic borrow money or enter payment plans not because the tax is unfair but because they did not prepare.

Setting money aside monthly changes the entire experience. The bill stops being a shock and becomes a formality. More importantly it gives you confidence to spend and invest knowing what money is truly yours.

Understanding What You Actually Need to Save For

Before you can set money aside properly you need to understand what the tax bill represents. This sounds obvious but it is where many people go wrong.

Your tax bill may include:

• Income tax

• Class 2 and Class 4 National Insurance if you are self employed

• Student loan repayments

• High Income Child Benefit Charge

• Capital gains tax

• Payments on account for the following year

Payments on account are particularly important. They effectively mean you are paying part of next year’s tax early. If you do not plan for them you can feel like you are being taxed twice.

The amount you need to save is therefore not just last year’s tax divided by twelve. It needs to reflect your current income level and how HMRC calculates future payments.

Estimating Your Tax Percentage

One of the most practical ways to manage tax is to think in percentages rather than pounds. Each time money comes in you set aside a fixed percentage immediately.

For many of my clients this is the turning point. It removes decision making and replaces it with a habit.

The right percentage depends on your situation but as a rough guide:

• Basic rate self employed income often needs around 20 to 25 percent

• Higher rate income may require 30 to 40 percent

• Landlords with higher earnings may need more depending on reliefs

• Directors taking dividends need a different calculation entirely

These are not rules and they are not personalised advice. They are starting points. The safest approach is to err slightly on the high side early on and adjust later.

Saving too much temporarily is far less painful than saving too little.

Separate the Money Physically

One of the most effective techniques I recommend is keeping tax money physically separate. Not just mentally but in a different account.

If the money sits in your main account it does not feel like tax money. It feels spendable. That is human nature.

I usually suggest:

• A separate savings account labelled tax

• No card access

• No standing orders going out

• Easy transfer back when the bill is due

Every month or every time you get paid you move the tax portion immediately. Treat it like rent. Once it has moved it is no longer part of your available balance.

People who do this consistently rarely struggle with tax bills even when the amounts are large.

Monthly Saving for Sole Traders

If you are self employed monthly saving is essential. Your income is variable and HMRC will not smooth that volatility for you.

The simplest system is this:

• Each time you receive income transfer a fixed percentage to your tax account

• Review the percentage quarterly

• Adjust if income increases significantly

This works whether you are paid weekly monthly or irregularly. The key is linking the saving action directly to receiving income.

Waiting until the end of the month often leads to shortfalls. The money has already been absorbed into day to day spending.

What About VAT

VAT complicates things further because it is not your money at all. It belongs to HMRC from the moment you collect it.

One of the biggest mistakes I see is VAT being used as working capital. This creates cash flow issues later and can spiral quickly.

If you are VAT registered you should:

• Transfer VAT received into a separate VAT account

• Never rely on it for general spending

• Check VAT returns early not at the deadline

If you are on the Flat Rate Scheme the VAT calculation is different but the principle is the same. Set it aside early.

Mixing VAT and income tax planning is dangerous. They should be treated separately.

Planning for Payments on Account

Payments on account catch many people out in their second year of Self Assessment. The first year feels manageable. The second year feels brutal.

This happens because you are asked to pay:

• The remaining balance for the previous year

• Plus 50 percent of that amount towards the current year

• Twice

If you know this is coming you can plan for it. If you do not it feels like an unfair demand.

The best way to handle payments on account is to:

• Include them in your monthly saving percentage

• Spread the cost across the entire year

• Adjust if your income drops and a reduction is justified

Ignoring payments on account until January is one of the fastest ways to create tax stress.

Using Budgeting Tools and Automation

You do not need complex software to manage tax saving but automation helps.

Useful options include:

• Standing orders into your tax account

• Banking apps that split income automatically

• Simple spreadsheets reviewed monthly

• Accounting software with tax estimates

The best system is the one you will actually use. I would rather see a basic setup followed consistently than a perfect system abandoned after two months.

What If Income Is Irregular

Irregular income makes planning harder but also more important.

In these cases I suggest:

• Saving a higher percentage in good months

• Maintaining a small buffer in the tax account

• Reviewing projections more frequently

When income is unpredictable monthly saving gives you stability. It smooths out the peaks and troughs and prevents panic when quieter periods arrive.

Company Directors and Tax Saving

If you run a limited company the approach changes but the principle remains the same.

Corporation tax is payable by the company not you personally. Dividend tax is payable personally.

This means you may need:

• A corporation tax savings pot within the company

• A personal tax savings pot for dividends

• Clear separation between business and personal funds

Many directors take dividends without setting aside the tax. This works until it does not. The bill arrives long after the money has been spent.

Planning at the point of withdrawal is crucial.

Reviewing and Adjusting Your Plan

Tax planning is not set and forget. Income changes tax rules change and personal circumstances change.

I encourage clients to review their tax saving approach at least twice a year. This does not need to be complicated. A simple sense check is often enough.

Ask yourself:

• Has my income increased significantly

• Have my tax rates changed

• Am I consistently over or under saving

Small adjustments early prevent large problems later.

What Happens If You Fall Behind

If you have not been setting money aside and a bill is approaching do not bury your head in the sand.

Options may include:

• Payment plans with HMRC

• Short term borrowing

• Adjusting spending temporarily

• Getting advice before the deadline

HMRC is far more flexible when you engage early. Silence makes things worse.

More importantly once the immediate issue is resolved you should put a system in place so it does not happen again.

The Psychological Side of Tax Saving

One thing rarely discussed is the emotional impact of tax. People resent it fear it and avoid thinking about it.

Monthly saving reframes tax as a neutral obligation rather than a looming threat. It becomes routine rather than emotional.

Over time this changes behaviour. People make clearer decisions about spending investment and growth because they understand their true position.

That clarity is powerful.

Key takeaways

Setting aside money for your tax bill each month is not about being disciplined or restrictive. It is about being realistic.

Tax is part of earning money in the UK. Ignoring it does not make it smaller. Planning for it makes it manageable.

From my experience the people who struggle least with tax are not those earning the most. They are the ones who treat tax as a monthly responsibility rather than an annual surprise.

A simple consistent system will do more for your peace of mind than any last minute scramble ever will.

You may also find our guidance on How can an accountant help reduce my tax bill, and How do I pay my tax bill once I have submitted my return, helpful when reviewing related personal tax questions. For a broader overview of Self Assessment deadlines, reporting, and obligations, you can visit our self assessment guidance hub.