How Much Should I Put Aside for Tax Each Month

One of the most common worries for self employed people, company directors and small business owners is how much money they should set aside for tax each month. Unlike employees who have tax deducted automatically through PAYE you are responsible for managing your own tax payments which means planning and discipline play a much bigger role in your financial routine. Many people learn this the hard way when their first big tax bill arrives and they realise they have not saved enough. In my opinion setting aside the right amount for tax is one of the most important financial habits you can build because it protects you from stress and helps you run your business with confidence.

There is no single number that suits everyone because each person’s tax situation is different. The right amount depends on how you work, how much you earn, how your business is structured and what other commitments you have. Yet even though everyone’s situation is unique there are clear principles that help you plan sensibly and avoid surprises. Once you understand how income tax, National Insurance and corporation tax work it becomes far easier to estimate what you should set aside each month and build a routine that works even when your income fluctuates.

Why You Need a Monthly Tax Saving Habit

The UK tax system requires self employed individuals to pay their tax once or twice a year depending on whether they make payments on account. Limited companies pay corporation tax nine months and one day after the end of their financial year. Directors may also need to pay personal tax on dividends through Self Assessment. Because of this timing it is easy to feel as though tax is a distant issue until the deadline suddenly appears.

The danger is that without a monthly saving habit the tax bill feels like a shock. You may have had a profitable year but if the money has already been spent on living costs, growth or investment you are left scrambling to raise funds when the deadline arrives. This stress grows even worse if you are in your second year of trading because payments on account can almost double your first tax bill.

Setting aside money each month prevents this cycle. It turns a large annual bill into a manageable monthly cost. It also provides peace of mind because you know the tax fund is building steadily. In my experience the psychological relief of having a dedicated tax pot is just as valuable as the financial security.

Understanding the Taxes You Need to Plan For

To work out how much to set aside you first need to understand which taxes apply to you. Self employed workers pay income tax and National Insurance through Self Assessment. Limited companies pay corporation tax then their directors pay personal tax on dividends if they take money out of the business.

Income tax for the self employed is calculated on your profits rather than turnover. National Insurance contributions can be a mixture of Class 2 and Class 4 depending on your level of profit. Payments on account may also apply which means you prepay part of the following year’s tax.

For company directors the company pays corporation tax on its profits and you pay income tax personally only on the money you withdraw from the business such as dividends or salary. If you take a salary the PAYE system handles your tax. If you take dividends you pay further tax through Self Assessment.

This means the question of how much you should save each month depends on which category you fall into. The goal is to build a saving strategy that matches your tax liabilities and smooths them out over the year.

How Self Employed Workers Should Plan Their Monthly Tax Saving

If you are self employed you can calculate your tax reserve more easily by thinking of your taxable profit as a whole. Your profit is your total income minus allowable business expenses. A common approach is to set aside a percentage of your profit each month so the saving grows steadily.

Although every situation is different a broad rule of thumb many people use is to save twenty to thirty percent of their profits for tax. Some save more if their income is high enough to push them into the higher rate tax band. Others save slightly less if their income is modest or if they have large expenses that reduce their taxable profit. The idea is not to be perfect but to be prepared.

It also helps to remember that payments on account can significantly affect the first two years of trading. When you file your first return you pay your tax for that year plus a payment towards next year’s bill. This makes the first tax bill feel very heavy. Saving monthly helps manage this effect so the pressure is spread across the full year rather than landing all at once.

How Directors of Limited Companies Should Plan Their Monthly Tax Saving

Planning is more layered for company directors because you need to consider both corporation tax and personal tax. The company needs to set aside money for its corporation tax bill. This tax is usually around nineteen percent or twenty five percent depending on profit levels with marginal relief applying to many businesses. Some companies use a flat percentage to keep things simple until the accountant calculates the exact bill at year end.

On top of this directors need to think about personal tax if they take dividends. Dividend tax is lower than income tax but it still has a significant impact. Directors often save personally for their dividend tax at the same time the company saves for its corporation tax. This creates a structured routine where every pound of profit has a clear tax plan.

I have seen many directors build a powerful discipline by separating their bank accounts. One account holds money for operations, one holds money for tax and one holds money for profit extraction. This separation reduces the temptation to mix funds and makes it easier to see how much is available to spend.

Planning for VAT If You Are VAT Registered

If your business is VAT registered you must also think about VAT as part of the monthly saving habit. VAT is collected on behalf of HMRC and must be paid every quarter. Many people use the VAT money as if it belonged to the business although this creates a cash flow issue when the payment becomes due.

A better approach is to set aside the VAT amount immediately. If you operate on the standard scheme you collect VAT on your sales and deduct VAT on your purchases. Once you know the net figure it helps to put that amount in a separate tax pot. Businesses using the flat rate scheme will find the calculation easier because the percentage is fixed.

How to Plan When Your Income Changes Month to Month

Many self employed people and directors have fluctuating income. One month might be exceptionally strong and the next may be unexpectedly quiet. In this situation a fixed monthly saving amount does not always work because it may be too high in lean months or too low in busy months.

The best approach is percentage based planning. Instead of saving a fixed number you save a fixed percentage of your income. This keeps the routine scalable. When income rises your saving rises. When income falls your saving adjusts automatically. The tax fund grows naturally in line with your business.

Another useful method is to base your saving on rolling averages. Look at your average earnings over the last six months and save a percentage of that average each month. This smooths the peaks and troughs.

Why Having a Separate Bank Account Helps

Separating your tax savings from your business operating account is one of the most effective things you can do. When all money sits in one account it becomes difficult to resist spending it. It also becomes harder to see how much of the balance belongs to you and how much belongs to HMRC.

By moving money into a dedicated tax savings account you remove the temptation to use it. You also gain a clear view of your financial position. Many business owners find that once the tax money is moved their stress reduces instantly because they know the funds are protected.

Some people go a step further and use multiple pots. One pot for VAT, one for corporation tax, one for personal tax and one for profit. This creates a disciplined structure around your finances.

The Psychological Benefit of Monthly Tax Saving

Beyond the numbers monthly saving has a psychological impact. It changes how you view tax. Instead of feeling dread when the deadline approaches you feel in control. The tax bill becomes a normal predictable part of your financial routine rather than a looming threat.

This mental shift improves decision making. When you know your tax obligations are covered you can invest in your business, plan for the future or take time off without anxiety. Cash flow becomes smoother and your work becomes more enjoyable because you no longer feel overwhelmed by hidden obligations.

In my experience this peace of mind is one of the strongest reasons to build a tax saving habit.

What to Do During Your First Year of Trading

The first year of business is where tax planning usually goes wrong because people misunderstand payments on account. When you submit your first tax return you do not just pay the tax for that year. You also pay half of the next year’s tax upfront. Six months later you pay the second half. This catches many people off guard because they assume the bill is only for twelve months.

To prepare for this it helps to save slightly more than you think you need during your first year. This extra buffer will help you absorb the impact of payments on account. After the first two years things become more predictable.

If you are incorporated then your first corporation tax payment comes nine months and one day after the end of your first accounting period. Because your first year may be shorter or longer than twelve months you need to understand your company’s accounting reference date and plan accordingly.

When It Is Sensible to Save More Than You Need

Some business owners choose to save more than their expected tax bill because they use the tax pot to build an additional safety buffer. This is not necessary for everyone although it can be extremely helpful if your income is unpredictable. Saving more than you need means that even if you have a sudden drop in income your tax pot remains secure. If the buffer grows larger than needed you can take money back later as a reward for good discipline.

Others save more because they want to avoid the temptation of spending all business profits. A tax pot can act as a self imposed limit that prevents you from taking money out until the business is stable.

How an Accountant Helps You Work Out the Right Amount

Working with an accountant makes tax planning easier. They can calculate your expected tax bills based on real numbers, track changes in your profits and update your saving strategy throughout the year. They can also explain how payments on account work, how dividends affect tax and how your business structure influences your tax position.

Accountants also help you forecast your finances. They can show you how much cash you should keep in reserves, when to expect upcoming bills and how to avoid last minute surprises. This guidance builds confidence and consistency.

If you use accounting software your accountant can monitor your figures in real time and advise you when to adjust your savings. This turns tax planning into a smooth ongoing process rather than a once a year scramble.

Why Saving for Tax Helps You Grow Your Business

When tax planning becomes part of your routine your business becomes more resilient. You stop worrying about finances and start planning strategically. You make clearer decisions about pricing, hiring, investment and growth. You also create a financial rhythm that prepares your business for larger projects or seasonal fluctuations.

A business that saves monthly for tax has more control over cash flow. This stability makes it easier to borrow money if needed because lenders view disciplined financial behaviour as a sign of strength. It also helps you set goals and budgets with greater accuracy.

Conclusion

There is no single amount that every business owner should save each month for tax although the principle is simple. You must save enough consistently so that when tax deadlines arrive the money is already set aside. Whether that means saving twenty percent of your profits, thirty percent of your turnover, a fixed monthly amount or a flexible percentage that changes with your income the most important habit is consistency.

Once you understand your tax obligations and build a routine you gain a sense of control that transforms your financial confidence. You stop fearing tax bills and start planning for them. You understand your numbers better and make better decisions. You also protect your business from surprises which is one of the strongest markers of long term success.

In my opinion the best tax planning habit is not trying to find the perfect number but choosing a number that you can stick to month after month. The discipline will take you further than the calculation itself.