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

Saving for your tax bill can be stress-free with the right approach. Learn how to calculate, automate, and manage your monthly savings to stay financially prepared.

Introduction

If you are self-employed or run a small business, one of the biggest challenges is ensuring you have enough money to pay your tax bill when it is due. Without an employer deducting tax through PAYE, you are responsible for setting funds aside for Income Tax, National Insurance, and potentially VAT.

Failing to plan ahead can lead to cash flow stress and unexpected financial strain when HMRC’s payment deadline arrives. The good news is that by building good financial habits and using a few practical tools, you can easily set money aside each month for your tax obligations.

Understand What You Need to Pay

Before you can set money aside, you need to know roughly how much you owe. The main taxes that self-employed individuals and small business owners pay are:

  • Income Tax: Charged on profits after allowable business expenses.

  • National Insurance contributions (NICs): Class 2 and Class 4 NICs apply to most self-employed people.

  • VAT (if registered): Usually payable quarterly, though you can also plan monthly if that fits your cash flow.

  • Payments on account: Advance payments made twice a year towards next year’s tax bill if your tax liability exceeds £1,000.

Understanding these liabilities will help you calculate a realistic percentage of your income to save each month.

Estimate How Much to Set Aside

A simple way to estimate how much to save is to use a percentage of your income. Although the exact figure depends on your earnings and expenses, these general guidelines can help:

  • Basic-rate taxpayers: Save around 20 25% of your profits.

  • Higher-rate taxpayers: Save around 40% of your profits.

  • Self-employed with NICs: Add an extra 9% for Class 4 contributions.

  • VAT-registered businesses: Put aside the VAT you collect so it is ready when your return is due.

If you are unsure about your tax rate, an accountant can calculate an exact figure based on your expected income and deductible expenses.

Use a Separate Tax Savings Account

The easiest and safest way to manage tax savings is to open a separate bank account specifically for tax. Treat this as a non-negotiable account for future payments to HMRC.

Each time you get paid:

  1. Transfer your tax percentage into the separate account immediately.

  2. Avoid dipping into the account for everyday expenses.

  3. Check the balance regularly to make sure it aligns with your expected liabilities.

Some people find it helpful to use high-interest business savings accounts, so their tax savings earn interest while they wait to pay HMRC.

Automate Your Savings

If you have regular income, setting up an automatic transfer to your tax savings account makes the process effortless.

For example, if you pay yourself weekly or monthly, arrange for your bank to automatically move a set amount (say 25% of income) into the tax account on the same day you receive payment.

Automation removes the temptation to spend money that should be reserved for taxes.

Track Your Income and Expenses

Accurate bookkeeping is essential for calculating how much tax you owe and avoiding unpleasant surprises. Use accounting software such as QuickBooks, Xero, or FreeAgent to:

  • Record income and expenses in real time.

  • Estimate profits and taxes owed.

  • Generate reports to track your progress.

Keeping your records up to date means you will always have a clear picture of your tax position, allowing you to adjust your savings if income fluctuates.

Plan for Payments on Account

If your tax bill is more than £1,000, HMRC usually requires payments on account, which are advance payments for the next tax year. These are due by 31 January and 31 July each year.

To avoid being caught off guard:

  • Include these payments in your savings calculations.

  • Divide your estimated total tax (including payments on account) by 12 and save monthly.

By doing this, you will always have enough set aside for both instalments.

Save Monthly, Even During Quiet Periods

If your income varies throughout the year, it is still important to save consistently. During busy months, consider saving a slightly higher percentage to make up for slower periods.

A good approach is to base your savings on your average monthly income rather than individual fluctuations. This ensures steady progress towards your tax fund.

Use HMRC’s Budget Payment Plan

HMRC offers a Budget Payment Plan for taxpayers who prefer to make regular payments towards their tax bill. You can set up a direct debit to pay weekly or monthly amounts directly to HMRC in advance.

This is especially helpful if you struggle with discipline or worry about accidentally spending your savings. The payments will reduce your balance when your official bill is due.

Monitor Your Cash Flow

Setting aside tax money should not leave your business short of funds for daily operations. Review your cash flow regularly to ensure you have enough to cover bills, wages, and ongoing expenses.

If you find yourself struggling to save and maintain cash flow, review your pricing, payment terms, or cost structure with your accountant to improve liquidity.

Example Scenario

Mark is a self-employed photographer earning £3,000 per month on average. His accountant advises him to save 25% of income for Income Tax and NICs, plus VAT if applicable.

Each month, Mark transfers £750 into a separate tax account. By the end of the tax year, he has saved £9,000, enough to cover his tax bill in full without stress or last-minute borrowing.

The Role of an Accountant

An accountant can make tax planning much easier by:

  • Calculating how much tax you should save each month.

  • Estimating your future liabilities based on current income.

  • Advising on allowable expenses to reduce your tax bill.

  • Helping set up a cash flow forecast.

  • Reminding you of deadlines for Self Assessment and payments on account.

Even if you manage your finances independently, consulting an accountant once or twice a year can provide peace of mind and ensure your savings strategy is accurate.

Common Mistakes to Avoid

  • Underestimating tax: Always overestimate slightly to create a safety buffer.

  • Spending your tax fund: Keep it separate and off-limits.

  • Ignoring payments on account: These can double your tax liability if not planned for.

  • Waiting until year-end: Saving monthly spreads the cost and prevents last-minute panic.

Conclusion

Setting aside money for your tax bill each month is one of the simplest yet most effective financial habits for self-employed individuals and small business owners. By calculating your tax rate, saving a fixed percentage of income, and using a separate account, you can avoid stress and stay in control of your finances.

Working with an accountant ensures your estimates are accurate and that you take full advantage of allowable expenses and tax reliefs. Planning ahead means that when your tax bill arrives, you are ready — calm, prepared, and financially secure.