If you run a limited company, one of the biggest mistakes you can make is spending money that actually belongs to HMRC. Your business bank balance might look healthy, but not all of it is yours to keep.
A good rule is to put money aside for tax as soon as you’re paid. This makes tax bills much easier to manage and helps you avoid that last-minute panic when payment deadlines arrive.
In this guide, we’ll explain how much a limited company should put aside for tax, what taxes you need to think about and how you can make saving for tax almost effortless.
Why should you save for tax?
Running a limited company comes with several different tax responsibilities. Depending on your business, you could be paying:
- Corporation Tax on your company’s profits.
- VAT if you’re VAT registered.
- PAYE and National Insurance if you employ staff or pay yourself a salary.
- Dividend tax personally if you take dividends from the business.
Because these payments happen throughout the year rather than every time you receive money from a customer, it’s easy to think your business has more cash available than it actually does.
Getting into the habit of setting money aside every month means you’ll always know what’s available to spend and what’s reserved for HMRC.
So, how much should a limited company save?
Every business is different, so there isn’t one magic percentage that works for everyone. However, as a sensible guide, many accountants recommend putting aside around 25% to 30% of your profits for Corporation Tax.
You’ll also need to keep aside:
- 100% of any VAT you’ve collected from customers if you’re VAT registered.
- PAYE and National Insurance deducted through payroll.
- Money for your personal tax bill if you take dividends.
If your profits fluctuate throughout the year, it’s usually better to save a little too much than not enough. Any extra money can always be released later once your accounts are finalised.
Understanding Corporation Tax
Corporation Tax is charged on your company’s taxable profits, not your total sales.
Your profits are worked out after deducting allowable business expenses, which is why accurate bookkeeping is so important.
The more up to date your accounts are, the easier it is to estimate your future Corporation Tax bill and avoid surprises.
Using Xero means you can see your business performance in real time rather than waiting until your year end accounts are prepared.
Don’t spend your VAT
One of the biggest cash flow mistakes business owners make is treating VAT as income.
If you’re VAT registered, the VAT your customers pay doesn’t belong to your business. You’re simply collecting it on behalf of HMRC.
The easiest solution is to move the VAT into a separate savings pot every time you’re paid. Then, when your VAT return is due, the money is already waiting for you.
Paying yourself
Most company directors take a combination of salary and dividends.
If you pay yourself through payroll, your company may need to pay PAYE and National Insurance.
If you take dividends, you’ll usually pay any dividend tax personally through Self Assessment.
Although dividend tax isn’t paid by the company, it’s still worth putting money aside throughout the year so you aren’t left with an unexpected personal tax bill.
Create separate tax pots
One of the best habits you can develop is separating your tax money from your day-to-day spending.
Many business owners create dedicated savings pots for:
- Corporation Tax
- VAT
- PAYE
- Personal tax
This gives you a much clearer picture of how much money your business actually has available.
It also removes the temptation to dip into money that you’ll eventually need to pay HMRC.
Make saving for tax easy
Saving for tax doesn’t have to be complicated.
If you bank with Monzo Business, you can create separate savings pots specifically for your tax money. It’s a simple way to keep your Corporation Tax, VAT and other tax savings separate from your everyday business spending.
Combined with Xero, it gives you a clear picture of your finances and makes managing cash flow much easier throughout the year.
If you’d like to open a Monzo Business account, you can use my referral link below. If you sign up using my link, we’ll both receive £50 at no extra cost to you.
Tips to avoid tax surprises
A few simple habits can make a huge difference when it comes to managing your taxes.
- Move money into your tax pots every time you get paid.
- Keep your bookkeeping up to date in Xero.
- Review your profits every month.
- Don’t treat VAT as income.
- Speak to your accountant before taking large dividends.
- Plan ahead for HMRC payment deadlines.
These small steps can save you a lot of stress later on.
What Should You Take Away From This?
So, how much should a limited company put aside for tax?
There isn’t a magic percentage that works for everyone. Your Corporation Tax depends on your taxable profits, and you may also need to plan for VAT, PAYE, National Insurance and your own personal tax depending on how you run and pay yourself from the company.
The important thing is to start putting money aside before the bill arrives.
Keep your bookkeeping up to date in Xero, check your profit regularly and move money into dedicated tax pots throughout the year. Once you know roughly what your company is likely to owe, your accountant can help you fine-tune how much you should be saving each month.
And if you want an easy way to separate your tax money from your everyday spending, dedicated business banking pots can make a huge difference.
If you’re unsure whether you’re setting aside the right amount, or you’d like tailored advice for your business, book a call with us, and we’ll help you get clarity on your tax position and cash flow planning.
Ready to start your tax pot?
👉 Open a Monzo Business account and get £50
Affiliate disclosure: If you open an account through my referral link and meet the offer requirements, we may both receive £50. Please check the current offer terms before signing up.
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