How much tax should a sole trader set aside?

Why sole traders get caught out

When you're an employee, tax comes out before the money reaches you. As a sole trader, every invoice arrives gross — the tax is still inside it, and the bill for it lands later, often at a moment the money has already been spent. The single most useful bookkeeping habit a sole trader can build is moving a slice of every payment somewhere it can't be touched.

How big a slice depends on how much you'll earn for the whole year, because Australia taxes your total income for the year, not each invoice.

The 2026–27 tax brackets

These are the Australian resident rates for the 2026–27 income year (1 July 2026 to 30 June 2027). This is the year the 16% rate dropped to 15% — it falls again to 14% from 1 July 2027.

$0 – $18,200: nil. $18,201 – $45,000: 15c for each $1 over $18,200. $45,001 – $135,000: $4,020 plus 30c for each $1 over $45,000. $135,001 – $190,000: $31,020 plus 37c for each $1 over $135,000. $190,001 and over: $51,370 plus 45c for each $1 over $190,000.

On top of that, most people pay the Medicare levy of 2% of taxable income. Low earners pay a reduced levy or none.

What that looks like in practice

Say your taxable income for 2026–27 comes out at $60,000 — that's income after deductions. The brackets put the tax at $8,520, the Medicare levy adds $1,200, and the low income tax offset trims about $100 off — roughly $9,600 all up, or about 16 cents in every dollar you earned.

At $90,000 taxable income it's roughly $19,300 including the levy — about 21 cents in the dollar. The percentage climbs as you earn more, which is why a single flat guess made in July can be badly wrong by June.

A sensible rule of thumb

Many sole traders set aside 20–30% of every payment that comes in: toward the lower end if you expect to land under about $70,000 taxable, toward the higher end above that, and more again past $135,000. If you're registered for GST, remember the GST portion of your invoices was never your money at all — set it aside on top, in full.

It's a starting point, not a formula. Deductions, other income, HELP repayments and offsets all move the real number. The closer your books are to current, the closer you can cut it.

PAYG instalments: the ATO starts collecting early

After your first year with business income, the ATO usually moves you onto pay-as-you-go instalments — quarterly prepayments toward next year's bill, based on your last return. They're not an extra tax, but they do change your cash rhythm: the set-aside stops being a lump you hold until tax time and becomes a float you draw on every quarter.