The 30% Rule: Setting Aside Tax Money as a Freelancer

Most freelancers who get stung at tax time don't have a deductions problem or a business structure problem. They have a spending problem. They spent money that belonged to the ATO.

When a client pays you $10,000, that's not $10,000 of your money. Somewhere between $2,500 and $4,500 of that belongs to the tax office, and they will come for it. The freelancers who sleep well at tax time are the ones who separate that money the moment it arrives.

30%

Set aside from every payment

39%

If GST registered (income tax + GST)

$22,788

Tax on $100k income

Why the 30% rule works

The idea is simple: every time a client payment hits your account, transfer 30% to a separate savings account and don't touch it.

Why 30%? Because for most freelancers earning between $60,000 and $180,000, your effective tax rate (income tax + Medicare Levy) lands somewhere between 22% and 34%. The 30% figure gives you a comfortable buffer without being so high that you're starving your business of cash.

The effective tax rate at different income levels (2025-26 rates, before deductions):

Taxable income	Income tax	Medicare (2%)	Total tax	Effective rate
$60,000	$8,788	$1,200	$9,988	16.6%
$80,000	$14,788	$1,600	$16,388	20.5%
$100,000	$20,788	$2,000	$22,788	22.8%
$120,000	$26,788	$2,400	$29,188	24.3%
$150,000	$37,838	$3,000	$40,838	27.2%
$180,000	$48,938	$3,600	$52,538	29.2%

At $100,000, your effective rate is 22.8%. Setting aside 30% gives you a 7.2% buffer, enough to cover the tax on income you haven't accounted for yet, plus a cushion for PAYG instalments and any GST obligations.

Tip

If you make voluntary super contributions, your taxable income will be lower. You could potentially set aside 25% instead of 30%. But unless you're sure about your contribution amount in advance, 30% is the safer default.

How to set it up

Open a separate savings account

Use a different account from your day-to-day business account. Most banks offer free savings accounts (ING, Up, Macquarie, and Ubank all have zero-fee options with decent interest rates). Label it "Tax Money" or "ATO Savings." The psychological separation matters.

Set the transfer rule

Every time a client payment arrives, transfer 30% to the tax account. Do it the same day, before you get used to seeing the full amount. If your accounting software supports bank rules, automate it. Example: Client pays $5,500 → Transfer $1,650 → $3,850 is your actual money.

Pay tax obligations from this account

Use the tax savings account to pay PAYG instalments (quarterly), GST on your BAS (quarterly), your annual tax bill, and any ATO debts. After paying your annual tax, any leftover is yours. Consider a catch-up super contribution.

Should you set aside more than 30%?

If you're registered for GST, yes. GST adds another layer.

When you invoice $11,000 (including $1,000 GST), the GST portion isn't your income. It's the ATO's money that you're temporarily holding. You need to account for:

~30% for income tax on the GST-exclusive amount ($10,000)
Plus the full GST component ($1,000)

The practical approach: set aside 39% of GST-inclusive payments. That covers both income tax and GST in one transfer.

Example (GST registered): Client pays $11,000 → Transfer $4,290 (39%) to tax account → $6,710 is your actual money

If that feels aggressive, break it into two: 9% for GST and 30% for income tax. Same result, clearer mental accounting.

When 30% isn't enough

In some situations, 30% undershoots:

Your income is above $180,000. Your marginal rate is 37-45%, and your effective rate approaches 30%+. Consider setting aside 35%
You have a side job with PAYG. Your freelance income sits on top of your PAYG income, so it's taxed at your highest marginal rate. If your PAYG job puts you in the 37% bracket, every freelance dollar is taxed at 37%+ from the first dollar
You haven't been paying instalments. If you're entering the PAYG instalment system for the first time, you'll owe last year's tax PLUS your first quarterly instalment in the same period. Build up a bigger buffer

When 30% is too much

And sometimes it's more than you need:

You have substantial deductions. Home office, equipment, insurance, and other deductions reduce your taxable income. If your deductions reliably total $20,000+ per year, your effective rate is lower
You make large super contributions. A $30,000 super contribution drops your taxable income by $30,000, significantly reducing your tax. If you consistently max out contributions, 25% might be sufficient
Your income is below $60,000: your effective rate is under 17%. Setting aside 20-25% is plenty

The quarterly rhythm

Once you're in the system, tax payments become predictable. A typical freelancer's quarterly cycle:

Every time a payment arrives: Transfer 30% (or 39% if GST registered) to your tax account.

Every quarter (28th of Oct, Feb, Apr, Jul): Pay your PAYG instalment and GST (via BAS) from the tax account.

Every October/November (or whenever you lodge): Pay any remaining tax from your annual return. Pocket any surplus in the tax account.

Every May/June: Make your annual super contribution. This reduces next year's tax obligation. Don't leave this to the last week of June.

No scramble in October. No surprise bills. No payment plans.

The money is there because you separated it from day one.

Key takeaway

The 30% rule isn't about being precise, it's about being disciplined. Whether the right number is 25% or 35% matters less than doing it consistently. Overpaying into a savings account and getting the surplus back at tax time is infinitely better than underpaying and scrambling for cash.

What to do if you haven't been saving

If you're reading this mid-year with nothing set aside, don't panic. You can still catch up:

Start the 30% transfers now for all future payments
Estimate what you owe so far. Use our super calculator to get a rough tax estimate based on your income
Set up a payment plan if needed. The ATO offers payment plans for amounts you can't pay in full. Call them before the due date, not after
Consider making a super contribution. If you have some cash available, a voluntary super contribution reduces your taxable income and therefore your tax bill. Make sure you can still pay what you owe

The ATO charges about 11% interest (General Interest Charge) on late payments. A payment plan stops penalties from escalating.

Want the complete picture?

The Complete Guide to Freelancing in Australia covers this topic and 12 more chapters: tax, super, BAS, contracts, pricing, and more.

Free tools for Australian freelancers

See how much you could save with super, or find your minimum hourly rate.

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Frequently asked questions

Can I use a term deposit instead of a savings account?

Not practically. You need the money quarterly for BAS and instalment payments. A savings account with at-call access makes more sense.

What if my income is wildly unpredictable?

That's the beauty of a percentage-based rule. It scales automatically. Earn $15,000 one month, transfer $4,500. Earn $3,000 the next, transfer $900. The percentage is constant even when the dollar amounts bounce around.

Should I earn interest on the tax money?

Yes. Any interest you earn on the savings is income you'll pay tax on, but it's still free money. A high-interest savings account earning 5% on a $15,000 average balance nets you about $750 per year. That's a decent return for money that was just sitting there anyway.

How does this work with a Pty Ltd?

Similar principles, different mechanics. The company pays 25% company tax on its profits, and you pay personal tax on salary or dividends drawn. Talk to your accountant about the right set-aside percentage for your company structure. It depends on how you split salary vs dividends.