How Much Tax Should a Sole Trader Save in Australia?

Last updated: 2 March 2026

As a sole trader in Australia, you should generally save between 20% to 30% of your income for taxes, depending on your total earnings bracket. This buffer covers your income tax and Medicare levy obligations, which you must manage yourself since they aren't automatically deducted like an employee's wages.

This guide will help you understand how much you should be saving to avoid an unexpected tax bill at the end of the financial year.

Understanding Your Tax Obligations

As a Sole Trader, there are generally two types of tax you need to worry about:

1. Income Tax: You pay tax on your "net profit." In simple terms, this is your total income minus any allowable business expenses (like equipment, software, or travel). You don't pay tax on every single dollar you earn, just what's left over after deducting the costs of running your business. This remaining profit is taxed at the same individual marginal tax rates as an employee.
2. GST (Goods and Services Tax): If your business turnover is $75,000 or more per year, you MUST register for GST. This means you must add an extra 10% to your invoices. You collect this money from your clients, but it isn't yours to keep - you are just holding it for the ATO. Every quarter, you report and pay this collected GST to the ATO using a simple form called a Business Activity Statement (BAS).

The Rule of Thumb: How much to save?

Because your income tax rate depends on your total earnings for the year, it's impossible to give a single flat percentage that applies to everyone. However, accountants generally recommend a rule of thumb to keep you out of trouble:

If you are NOT registered for GST:

Save 20% to 30% of every invoice you get paid into a separate high-interest savings account.

• If you earn under $45,000, 20% is usually very safe.
• If you expect to earn over $120,000, you should be saving closer to 30-35%.

If you ARE registered for GST:

Save an additional 10% on top of your income tax savings. So, if you are saving 25% for income tax, you should be saving 35% total of every payment received (this covers the 10% GST you collected on behalf of the ATO, plus your income tax).

The Danger of Guessing

The problem with the "Rule of Thumb" is that it is exactly that - a guess.

If you save too little, you'll owe the ATO thousands of dollars you don't have. If you save too much (e.g. saving a flat 40% just to be safe), you are artificially restricting your cash flow. You might be stressing about buying new equipment or paying yourself, even though you actually have the money.

The Smart Way: Automated Tax Buffers

Rather than guessing, modern businesses use intelligent software to tell them exactly what they need to save based on their actual income and current tax brackets.

This is where the concept of a Smart Tax Buffer changes the game.

By automating the calculation, you eliminate the stress of EOFY entirely. You know exactly what belongs to the ATO, and you know exactly how much of your hard-earned cash is truly yours to spend.

References & Resources

• ATO: Individual income tax rates
• ATO: Registering for GST
• ATO: Deductions for operating expenses