How to set money aside for VAT and tax

Step 1 — open a dedicated tax account

The single most effective habit is a separate bank or savings account for tax money. If VAT and corporation-tax cash never sits in your main account, you cannot accidentally spend it. Many business banks let you open pots or sub-accounts for exactly this.

Step 2 — move money as it comes in

Do not wait until the bill. Each time you get paid, move the tax portion across straight away. For VAT that means shifting the VAT you charged out of reach; for corporation tax, a rough percentage of profit. Real-time set-aside beats a year-end scramble every time.

Step 3 — use sensible percentages

Set aside the VAT on each sale (the calculator makes this exact), plus roughly 19–25% of profit for corporation tax depending on your profit level, plus PAYE and National Insurance if you have staff. When in doubt, err high — a small surplus at year end is a good problem.

Step 4 — automate and review

Automate the transfers where you can, and review the balance against upcoming bills each month using your cash-flow forecast. If a bill is bigger than the pot, you will see it coming with time to arrange short-term finance rather than miss a deadline.

When the buffer falls short

Even with a good system, timing can bite — a big bill in a slow month. A short working-capital facility bridges it and is repaid as you trade.

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Read understanding your VAT bill.