Tax Saving

To keep on top of saving for tax, you need to know about current tax rates.

At the time of writing:

  • The tax-free allowance is £12,500, meaning you don’t pay any tax on the first £12,500 of earnings
  • Earnings between £12,501–£50,000 are taxed at 20%
  • Earnings between £50,001–£150,000 are taxed at 40%
  • Anything above this is taxed at 45%

For limited company owners, there’s a tax-free dividend allowance of £2,000.

There’s also National Insurance to consider. For sole traders, that means Class 2 payments of about £3/week and Class 4 payments of either:

  • 9% on profits between £9,501–£50,000
  • 2% on profits above £50,000

Lastly, don’t forget about Student Loan contributions.

Limited companies

Limited company accounts are more complicated, and will depend on how you’re paid. Check with your accountant about how much you should be setting aside to cover the tax bills you’ll have.

How much to save

The common advice for sole traders is to save roughly 30% of each invoice to cover tax bills. Given the figures above, that would seem to make sense.

The final % may work out higher or lower depending on your turnover, expenses and other factors. If you’re new to self-employment, this is good place to start.

Saving this amount from day one should put you in a good position to pay tax bills and any payments on account. It’s worth keeping an eye on your income/expenses and doing some rolling totals in your first year or two.

Some accounting software will give you real-time forecasts of your tax bill throughout the year. This is one of their more useful features.

If you know roughly what your income is likely to be, you might choose another method of saving.

Tax, Pensions & Accounting sponsor

Penfold logo.

Penfold

Our friends at Penfold provide the self-employed (whether you’re a freelancer or Limited Company) with a completely digital, FSCS-protected & FCA-regulated pension: 

  • It’s simple to use & completely flexible – pause your contributions or make one-off top-ups any time you like. 
  • HMRC adds £25 for every £100 you pay in...or more for higher earners!
  • LTD companies can deduct contributions from their tax bill
  • Work Notes readers get £25 in their pension by using the referral link (or referral code: Work Notes)!

Pensions are a long term investment, and your capital is at risk.