Your Self-Employed Tax Pot: Where to Keep It (2026/27)

A separate account keeps the money for the tax bill from being spent. The next step is easy to miss: the pot earns interest, that interest counts as income alongside your profit unless it sits in an ISA, and if you make payments on account, the tax on it raises those too.

This guide covers where the pot can sit, what its interest costs, and the three places the interest catches people out - the band test, Scotland, and the new savings rates from 2027/28.

Your tax pot's interest counts as income

The savings allowance is £1,000 of interest a year if none of your income is in the higher or additional rate band (this includes people who pay no Income Tax), £500 if some of it is in the higher rate band, and nil if any of it is in the additional rate band. The band for this test is the UK band, even if you pay Scottish Income Tax, and it counts the interest itself (both are explained further down).

HMRC adds together the interest from all your savings accounts, and the allowance covers that total, not each account on its own. Interest on any account in your name counts, including the account you call your tax pot.

For a joint account, HMRC splits the interest equally between the account holders. If you own the money in unequal shares, see the note at the foot of this page.

If you already send a Self AssessmentHMRC's system for reporting income and gains not taxed at source. The online return and payment deadline is 31 January after the tax year ends. return, you report the interest there, so the tax on it joins the balancing paymentThe top-up you pay on 31 January once your actual tax bill is known: your full Self Assessment liability for the year, minus any payments on account you already made toward it. Capital Gains Tax and student loan repayments always land here. due by 31 January after the tax year ends. GOV.UK sets out the reporting rule.

The pot alone may fit inside the allowance. The pot plus your other savings may not, as Example 1 shows.

The starting rate for savings can leave more interest untaxed, but only when your other income (not counting savings interest or dividends) is less than £17,570. Your profit counts as other income, so it helps only a sole trader with a small profit.

Example 1 - a basic-rate sole trader whose pot fits the allowance, until the emergency fund is added

All the examples on this page are for the 2026/27 tax year, outside Scotland, for an established sole trader who already makes payments on account. Each savings rate and balance is an assumption, not a rate on offer.

Profit £40,000 gives Income Tax and Class 4 National Insurance of £7,131.80 for the year. The tax pot averages £11,000 at 4%, which earns £440. An emergency fund of £15,000 at the same rate earns £600. Together that is £1,040.

The allowance is £1,000, so £40 is taxed at 20% and the tax is £8. The pot alone (£440) is inside the allowance. It is the fund on top that tips the total over.

If you make payments on account, the tax on the interest raises them too

Payments on accountAdvance payments toward next year's Self Assessment bill, due if the tax not taken at source was £1,000 or more and at least a fifth of your tax. Two payments, 31 January and 31 July, each half of it, so the first January can be 150% of it. are two advance payments toward your next bill, each half of last year's tax (including Class 4 National InsuranceClass 4 National Insurance: National Insurance paid by the self-employed on their profits, on top of Income Tax. For 2026/27 it is 6% on profits between £12,570 and £50,270, and 2% above that.), due by 31 January and 31 July.

You do not make payments on account if last year's Self Assessment tax was less than £1,000, or if more than 80% of last year's tax was paid outside Self Assessment, for example through PAYE.

If you do make them, the tax on your interest is part of last year's tax, so each payment on account rises by half of it. In the first year the interest appears, January collects its tax one and a half times: once in the balancing payment and half again as the first payment on account. If the interest rises, the same happens to the increase. In a later year with the same interest, last year's payments on account have already covered it, so its tax is paid once, half in January and half in July. The GOV.UK payments on account page has the rules.

Example 2 - a higher-rate sole trader, and the payments on account

Profit £80,000 gives Income Tax and Class 4 National Insurance of £22,288.60. The pot averages £27,500 at 4%, which earns £1,100. The allowance is £500, so £600 is taxed at 40%: £240.

That £240 is paid in the balancing payment, and it also raises each of the next two payments on account by £120. So in the first year of the interest, the January bill holds £360 of tax because of it (£240 plus £120), and the July bill another £120. The same £1,100 earned in a cash ISA would cost nothing, but this pot is larger than one year's ISA allowance, so only part of it could go in.

For the whole January stack - the first-year payments on account and the option to reduce them - see the Self Assessment tax bill guide. That guide covers what you pay and when. This one covers where the money waits.

The interest itself can move you into the higher rate band

To work out which allowance you get, you add all your interest to your other income.

So a sole trader whose profit sits just under the higher rate thresholdThe income level at which the higher rate of Income Tax starts: your Personal Allowance plus the basic rate band. Scotland sets its own bands for earned income, but Scottish taxpayers still use the UK threshold for dividends and savings. can cross it with the interest alone, and then the allowance halves. It is the same stacking idea as dividends, where other income comes first and the slice on top takes the band that is left: see how dividend tax is calculated.

Take a profit of £50,000 and £1,000 of interest. That is a total income of £51,000, above the £50,270 UK higher rate threshold. So the allowance is £500, and the tax on the interest is £200. If the band were set by the profit alone, the £1,000 allowance would cover all the interest and the tax would be £0.

Above £100,000 of adjusted net income (broadly your profit plus your interest, less pension contributions and Gift Aid), the Personal Allowance is reduced by £1 for every £2 of income over £100,000. Interest in that range also takes away allowance, so it costs more than the tax on the interest alone.

In Scotland, the allowance follows the UK bands

Scottish rates apply to your profit, but savings interest is taxed at UK rates against UK bands.

The allowance is set as if you were not a Scottish taxpayerSomeone whose main home is in Scotland for the tax year, as defined by HMRC. Scottish income tax rates apply to their wages, profits and pensions - but not to their savings, dividends or capital gains. (Income Tax Act 2007 s12B).

So a Scottish sole trader who pays the Scottish higher rate on part of their profit keeps the £1,000 savings allowance while their total income stays under the £50,270 UK higher rate threshold.

From 2027/28 the pot's interest is taxed at new savings rates

For the 2027/28 tax year the savings rates are 22%, 42% and 47% (Finance Act 2026 s5).

Interest the pot earns in the 2027/28 tax year is taxed at these rates. If this is your first year in Self Assessment, money you set aside through 2026/27 for the January 2028 bill stays in the pot for most of 2027/28. If you already make payments on account, the July payment in 2027 comes out of the pot first.

The same £1,100 of interest as in Example 2, earned in 2027/28 with the same profit, is taxed at 42% above the £500 allowance: £252, against £240 in 2026/27.

Where to keep the pot

An easy-access account in your name keeps the money there on the day, and its interest is covered by your allowance up to its limit.

Interest in a cash ISAIndividual Savings Account: A tax-free wrapper. Gains and income on investments held inside an ISA are free of Capital Gains Tax and dividend tax. The annual subscription allowance is £20,000. is free of tax, and you can pay in up to £20,000 each tax year across all your ISAs.

From 6 April 2027 the cash ISA limit is £12,000 a tax year for savers under 65 at the end of that tax year, within that £20,000. The regulations that set it are made (SI 2026/1018).

A tax pot is emptied for each bill. With a flexible cash ISA, you can take the cash out and put it back in the same tax year without using up more of that year's allowance. With an ISA that is not flexible, money you pay back in counts against the allowance again. Your provider can tell you which kind you have.

For what a tax-free rate is worth over several years, see the compound interest guide.

Premium Bond prizes are free of Income Tax, but a prize is never certain, so the bonds earn nothing you can count on for the bill.

If you use a notice or fixed-term account, make sure the money is free in time to reach HMRC by 31 January, and by 31 July if you make payments on account. Allow for the transfer: GOV.UK lists how long each way to pay takes. HMRC charges interest on tax paid late, at a rate set above the Bank of England base rate.

How much goes into the pot depends on your profit and your band. The self-employed tax calculator gives your own Income Tax and Class 4 figure for the year.