How to budget for Corporation Tax and VAT as a limited company

Understand when each bill falls due

The two biggest tax bills for most limited companies — Corporation Tax and VAT — have completely different timing, and managing them well starts with mapping the deadlines precisely. Corporation Tax is due nine months and one day after the end of your accounting period. For a company with a 31 March year-end, that means paying the bill on 1 January the following year. Large companies pay in quarterly instalments, but most small limited companies pay in one lump sum and this deadline rarely moves.

VAT, for the majority of VAT-registered companies on standard quarterly returns, is due one month and seven days after the end of each VAT quarter. If your VAT quarter ends 31 March, the return and payment are due by 7 May. Four times a year, like clockwork. Missing either deadline attracts automatic penalties and interest. Knowing the exact dates — and protecting the cash — is the whole task. Confirm your specific deadlines with your accountant and diary them for the year ahead.

Estimate your Corporation Tax bill throughout the year

You don't need to wait until your accountant files the tax return to have a working estimate of the Corporation Tax bill. The principle is simple: Corporation Tax is charged on taxable profit, which is broadly your accounting profit adjusted for tax purposes. As a working estimate during the year:

1. Take your net profit before tax from your most recent management accounts.
2. Add back any non-deductible items your accountant has flagged (certain entertaining, depreciation).
3. Deduct any capital allowances on qualifying asset purchases — these often reduce taxable profit materially in years with significant investment.
4. Apply the current Corporation Tax rate to get a rough bill estimate.

This is an approximation, not a formal calculation — your accountant will work the precise figure from the full tax computation. But an approximation used consistently throughout the year is far better than no estimate at all. Confirm the current rates and any reliefs you may qualify for with your accountant; this page is general guidance only.

Estimate your VAT liability each quarter

The VAT bill is more mechanical to estimate in advance. For a business on standard VAT accounting, the net position is simply output VAT (charged to customers on sales) minus input VAT (paid to suppliers on purchases). If your sales consistently attract a similar VAT rate and your purchases are relatively predictable, you can estimate the quarter's VAT position partway through the quarter rather than being surprised at the end.

A useful habit is to run a VAT report in your accounting software monthly and total the net position. By month two of the quarter you have a good estimate of the final bill. For businesses on the flat-rate scheme, the calculation is even simpler — a fixed percentage of gross turnover, applied to your sales figures. Either way, the aim is to know the rough number before the return is due, not on the day you need to pay it.

Set money aside as you earn it

The most reliable way to ensure the cash is there when the bill falls due is to move it into a separate account as you generate the profit or collect the VAT, not in a rush when the deadline approaches.

• For VAT: every time a VAT invoice is raised, mentally the VAT element is not yours — it belongs to HMRC. Move it to a separate account when the customer pays, or at least monthly. When the quarter closes, the money is already set aside.
• For Corporation Tax: set aside a percentage of your net monthly profit — roughly the current tax rate as a starting point — each month. This can sit in a business savings account or a designated reserve in your main account. By year-end, a year of monthly contributions means the bill is already funded.

This approach removes the cash-flow shock of a large tax bill arriving while you are in the middle of a quiet trading period. If you don't have a separate savings account for tax reserves, opening one is a ten-minute task that saves a great deal of stress.

What to do if the cash isn't there

If the bill arrives and the cash is short, act immediately. HMRC does offer a Time to Pay arrangement for companies that genuinely cannot meet a tax deadline — you contact HMRC before the due date, explain your position, and agree a payment schedule. Approaching HMRC proactively and before default is treated more favourably than ignoring the deadline and waiting for enforcement.

Short-term business finance can also bridge a one-off tax bill, provided the repayment fits comfortably within your normal cash flow. For a company that generates the profit to cover the bill but has a timing mismatch — the cash is tied up in receivables or stock when the tax falls due — a short-term working-capital facility can solve the problem cleanly. See our guides on forecasting cash flow and calculating affordability before borrowing for this purpose.