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How much tax should a contractor or freelancer set aside?

A practical way to ring-fence tax from every payment, with 2026/27 rates, key payment dates and what changes by umbrella, limited company or sole trader.

For everyone · 6 minute read · Updated 16 October 2026

The simplest tax habit for anyone paid gross is this: when money arrives, move the tax share out of the account you spend from. The harder question is how much that share is. It depends on how you are paid.

A starting point

In our 2026/27 examples at a £500 day rate, the share of each invoice that goes on tax, National Insurance and route costs is roughly:

  • Umbrella company: about 40%.
  • Limited company outside IR35: about 37%.
  • Sole trader: about 34%.

So a starting rule of between a third and 40% of what you invoice is sensible for many people at that level, then refine it with your own numbers. Lower earnings mean a smaller share, higher earnings a larger one.

How it works by route

Umbrella. Your umbrella deducts PAYE tax and National Insurance before it pays you, so what lands in your account is already net. You may still owe tax on other income.

Limited company. The company pays corporation tax: 19% on profits up to £50,000 and 25% above £250,000, with marginal relief between. You then pay personal tax on salary and dividends. For 2026/27 dividend tax is 10.75% in the basic rate band, 35.75% in the higher band and 39.35% in the additional band, after a £500 allowance.

Sole trader. You pay income tax at 20%, 40% or 45%, plus Class 4 National Insurance of 6% between £12,570 and £50,270 and 2% above, on your profit after expenses.

Dates to know

  • Self assessment: the balancing payment for the year is due on 31 January after it ends. If you are asked to make payments on account, they fall due on 31 January and 31 July.
  • Corporation tax: due nine months and one day after your company’s year end.
  • VAT: if you are registered, the VAT you charge is not your money. Keep it aside and pay it on your return dates. Registration is compulsory once taxable turnover passes the threshold, which is currently £90,000.

A simple routine

  1. Open a separate savings account for tax.
  2. When a payment arrives, move your tax share across the same day.
  3. Keep VAT, if you charge it, in its own pot.
  4. Review the percentage every quarter against your real figures.

The Money Pot in the Paylift app works out what to ring-fence from each payment and shows what is safe to spend.

General information and estimates, not tax advice. Rates are for England, Wales and Northern Ireland and may change.

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