How Much Should I Put Aside for Tax Each Month

At Towerstone Accountants we provide specialist small business accountancy services for owners, directors, and growing businesses across the UK. We created this webpage for small business owners who want clear guidance on managing finances, meeting tax obligations, and making informed decisions without jargon. Our aim is to help you stay compliant, improve cash flow, and build a more resilient business.

This is one of the most important questions you can ask if you are self employed, running a small business, or earning income outside of PAYE. It is also one of the questions people most often avoid until it becomes urgent. By the time HMRC asks for payment, the money has usually already been spent, and what should have been a routine obligation turns into stress, panic, or debt.

In my experience as a chartered accountant running my own firm, problems with tax rarely come from people trying to avoid paying it. They come from uncertainty. People simply do not know how much to set aside, when to do it, or how to judge whether they are on track. As a result, they guess, hope, or delay.

In this article, I want to explain clearly how much you should be putting aside for tax each month, why the answer depends on your situation, and how to build a simple system that works in real life. I will cover sole traders, limited company directors, side income, and common mistakes I see every year. This is written to be practical, calm, and grounded in how the UK tax system actually works.

Why Monthly Tax Saving Matters So Much

Tax is predictable, even when income is not. The problem is not that tax arrives unexpectedly. The problem is that people do not prepare for it consistently.

Putting money aside monthly matters because:

• Tax bills are often due long after income is received

• The amounts can be large compared to monthly spending

• HMRC deadlines are fixed and penalties are automatic

• Stress increases dramatically when tax is not funded

When tax money is ring fenced early, it stops feeling like a loss and starts feeling like a routine transfer.

Why There Is No Single Percentage That Fits Everyone

People often ask for a simple answer, such as a flat percentage to save each month. While there are useful rules of thumb, the reality is that tax depends on:

• Your business structure

• Your level of profit

• Other income

• Allowances and thresholds

Saving too little leads to problems. Saving far too much can create unnecessary pressure on cash flow. The goal is to be realistic and consistent.

The First Step Is Knowing How You Are Taxed

Before deciding how much to set aside, you need to understand how your tax is calculated. This depends on whether you are a sole trader, a limited company director, or earning side income.

Each is taxed differently, and mixing advice between them causes confusion.

Putting Aside Tax as a Sole Trader

If you are a sole trader, you pay tax on your profits, not on what you withdraw from the business.

Your tax bill is usually made up of:

• Income Tax

• Class 2 National Insurance

• Class 4 National Insurance

These are calculated through Self Assessment and are normally due by 31 January following the end of the tax year, with possible payments on account.

This timing gap is why so many sole traders struggle. Income arrives now. Tax is due later.

A Sensible Starting Percentage for Sole Traders

For many sole traders, a sensible starting point is to put aside between 25 percent and 30 percent of profit.

This is not a rule, but it works reasonably well for many people in early stages.

However, the right percentage depends on:

• Total annual profit

• Whether you cross higher rate thresholds

• Whether you have other income

Someone earning £15,000 a year will need a very different percentage from someone earning £60,000.

Why Profit Matters More Than Turnover

One of the biggest mistakes I see is people saving tax based on turnover rather than profit.

Tax is calculated on profit, which is income minus allowable expenses.

If you set aside tax based on total income without considering costs, you may over save or under save depending on margins.

This is why even simple bookkeeping makes a big difference.

Adjusting Your Tax Percentage as Income Grows

As profits increase, tax rates can change.

You may move from:

• No Income Tax

• To basic rate

• To higher rate

National Insurance also increases as profit grows.

This means the percentage you save in year one may not be enough in year three. Regular reviews matter.

Putting Aside Tax if You Have a Side Business

If you have a side business alongside employment, things become more complex.

Your employment income may already use up your personal allowance or basic rate band. This means your side income may be taxed at a higher rate.

In these cases, saving 30 percent may not be enough.

Many people with side income need to save closer to:

• 35 percent

• Or even 40 percent

This often surprises people, especially in the first year.

Putting Aside Tax as a Limited Company Director

Limited companies work very differently.

The company pays tax on its profits, and you pay tax personally on what you take out.

This means there are two layers of tax to think about.

Corporation Tax

The company pays Corporation Tax on its profits.

This is usually due nine months and one day after the end of the accounting period.

A sensible approach is for the company to set aside a percentage of profit each month into a separate account.

The exact percentage depends on current rates, but setting aside around 20 percent of profit is a common starting point.

This money should be treated as not available for spending.

Personal Tax on Salary and Dividends

If you take a salary, tax is usually deducted through PAYE. This part is relatively straightforward.

Dividends are different.

Dividend tax is paid through Self Assessment and is not deducted at source. This means you need to set aside money personally for dividend tax.

A common mistake is to forget that dividend tax exists at all until January arrives.

A sensible approach is to set aside:

• Around 10 percent to 20 percent of dividends received

The exact amount depends on:

• Your tax band

• Other income

• Available allowances

This should be reviewed annually.

Why Payments on Account Catch People Out

One of the biggest shocks for self employed people is payments on account.

Once your tax bill reaches a certain level, HMRC will ask you to make advance payments towards the following year.

This means in one January, you may be asked to pay:

• The tax for the year just ended

• Plus a large part of next year’s tax

This can feel overwhelming if you have not saved enough.

When planning monthly savings, it is important to factor in that first heavy year.

How to Build a Simple Monthly Tax Saving System

The most effective systems are simple and automated.

A good system usually includes:

• A separate savings account for tax

• Regular transfers based on profit

• Avoiding dipping into tax savings

Many people choose to move money monthly or weekly, depending on income patterns.

The key is consistency, not perfection.

Saving Monthly Versus Saving Per Payment

Some people prefer to save a percentage every time money comes in. Others prefer a monthly transfer.

Either approach can work.

What matters is that:

• Tax money is separated early

• You do not rely on memory or willpower

Automation reduces stress and mistakes.

What If Income Is Irregular

Irregular income is common, especially for freelancers and contractors.

In these cases, saving a percentage of each payment often works better than a fixed monthly amount.

This ensures saving scales with income.

During quiet months, pressure is reduced. During strong months, savings increase automatically.

What If You Cannot Afford to Save Enough Yet

This is more common than people admit, especially in early stages.

If you cannot yet afford to save the full recommended percentage, it is still better to save something than nothing.

This should be seen as temporary, not a permanent strategy.

As income stabilises, savings should increase.

Ignoring tax entirely rarely ends well.

Why Over Saving Is Usually Better Than Under Saving

If you are unsure, it is generally safer to save slightly too much rather than too little.

Any excess can be:

• Used for future tax

• Left as a buffer

• Withdrawn later once certainty increases

Under saving almost always leads to stress.

Common Mistakes When Setting Money Aside for Tax

Some of the most common issues I see include:

• Saving based on turnover instead of profit

• Forgetting about payments on account

• Using the tax savings for emergencies

• Assuming tax will somehow work itself out

These mistakes are understandable, but they are avoidable with structure.

How an Accountant Can Help You Get This Right

An accountant can help by:

• Estimating your likely tax bill

• Helping you choose a sensible saving percentage

• Adjusting savings as income changes

• Explaining future liabilities clearly

This guidance often pays for itself by preventing under saving and penalties.

Reviewing Your Position Regularly

Your tax saving strategy should not be static.

It should be reviewed:

• When income changes

• When expenses change

• At least once a year

Small adjustments early prevent large problems later.

Using Tax Savings to Reduce Stress

One of the biggest benefits of setting aside tax properly is psychological.

When January arrives and the money is already there, tax stops feeling frightening.

It becomes a transaction, not a crisis.

Clients who save consistently often say the same thing. They feel calmer, more in control, and more confident in their business.

Final Thoughts

So, how much should you put aside for tax each month?

The honest answer is that it depends on your income, your structure, and your wider situation. However, with the right understanding and a simple system, it does not need to be complicated.

For many people, starting with a sensible percentage, separating the money early, and reviewing regularly is enough to stay on track.

Tax is part of running a business. Preparing for it monthly is not pessimistic. It is responsible.

If you are unsure where to start, asking the question now puts you ahead of most people. Getting this right early can remove one of the biggest sources of stress in small business life and replace it with confidence and control.

You may also find our guidance on How can an accountant help my business save tax and How do I make my small business more tax efficient useful when exploring related small business questions. For a broader range of practical advice, you can visit our small business guidance hub.