The rule most people use
Ask around and you will hear the same answer: put aside thirty per cent of everything that comes in. It is easy to remember, it works often enough that nobody questions it, and it is the reason a fair few people come up short in January.
The trouble is that thirty per cent of turnover and thirty per cent of profit are very different numbers, and the gap between them grows with your costs. If you spend little, the rule is roughly safe. If you spend a lot, you are over-saving all year. If your income jumped last quarter, you are under-saving and will not notice until the bill arrives.
Where 30 per cent goes wrong
Two situations catch people out more than any others. The first is a good year after a quiet one, because payments on account are based on what you earned last time. The second is the first year of trading, when nothing has been due yet and the first bill covers eighteen months of profit at once.
- A jump in income means the bill and the payments on account both rise
- Your first bill often lands as eighteen months of tax at once
- Registering for VAT adds a separate quarterly sum that is not yours to keep
“Put aside a share of profit, not turnover. It takes one extra subtraction and removes most of the guesswork.”
What to do with the money
Move it the same day it comes in, into a separate account you have no card for. The friction is the point. A savings account that pays a little interest beats a pot inside your current account, and either beats counting on your balance staying high.
A second account with no card attached is the cheapest tax planning going.
When to stop guessing
If your income swings by more than half between quarters, or you are close to the VAT threshold, a fixed percentage stops being useful. At that point the figure needs working out each month against real numbers, which is what the monthly report is for.
If you would rather not think about it at all, that is fair enough. Ring us, and we will give you the number every month.
