Tax
6 min read
What to put aside for tax when income moves every month
A simple percentage rule works for most freelancers until it suddenly does not. Here is the version we give clients, and the two points where it breaks.
The rule most people use
Ask around, and you will hear the same answer: put aside thirty percent 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 end up short in January.
The problem is that thirty percent of turnover and thirty percent 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 in the last quarter, you are under saving and will not notice until the bill arrives.
Where 30 percent goes wrong
Two situations catch people out more than any others. The first is a good year following 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 one and a half years of tax together
Registering for VAT adds a separate quarterly amount that is not yours to keep
“Set 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 do not have a card for. The friction is the point. A savings account that pays a little interest is better than a pot inside your current account, and either is better than counting on your balance to stay high.
A second account with no card attached is the cheapest tax planning there is.
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 recalculating 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 tell you the number every month.
