Introduction
One of the most common questions we hear from small business owners is:
“How much tax should I be saving?”
If you don’t set enough aside, tax bills can come as an unpleasant shock. If you save too much, you restrict your cash flow unnecessarily. The right answer depends on how your business is structured and how much profit you make.
In this guide, we explain how much UK small businesses should typically save for tax, with simple examples for sole traders and limited companies.
How much tax should a sole trader save?
If you’re a sole trader, your tax is based on profit, not turnover.
As a rule of thumb:
- Most sole traders should save 20%–30% of profits
- Higher earners may need to save up to 40%
What that covers
- Income tax
- Class 2 and Class 4 National Insurance
Example
If your profit is £40,000:
- You might owe around £8,000–£10,000 in tax and NI
- Saving 25% (£10,000) during the year keeps you safe
Tip: Put tax money in a separate savings account so it’s not accidentally spent.
How much tax should a limited company save?
Limited companies are taxed differently.
Corporation tax
- Corporation tax is currently 25% for many companies (with lower rates for smaller profits)
- A good rule is to save 25% of company profits
Directors’ personal tax
If you take money as:
- Salary → PAYE deducted automatically
- Dividends → personal tax due later
You’ll usually need to save:
- 8%–15% of dividends, depending on your tax band
Example
If your company makes £60,000 profit:
- Save £15,000 for corporation tax
- Save additional funds for any dividend tax due personally
Common tax-saving mistakes small businesses make
Many tax problems come from simple errors, such as:
- Forgetting about payments on account
- Not setting aside money for VAT
- Assuming turnover = profit
- Spending tax money during quiet months
These mistakes are easy to avoid with basic planning.
How to make tax saving easier
A few simple habits can prevent stress later:
- Set aside tax money monthly
- Review your profit quarterly
- Keep bookkeeping up to date
- Get advice early — not just at year end
If you’re unsure what applies to your situation, getting professional advice can save you more than it costs.
Final thoughts
There’s no one-size-fits-all number, but having a plan is far better than guessing. Knowing roughly how much tax to save gives you confidence and control over your cash flow.
If you’re based in Dorset, or further afield, and want clarity on what you should be saving, we’re happy to help.