MoneySavingExpert Chair, Martin Lewis · Editor, Marcus Herbert

# Saving for tax

edited 30 November -1 at 1:00AM
8 replies 300 views
Forumite
151 Posts
edited 30 November -1 at 1:00AM
I'm needing a little bit of help. I'm self employed and putting a little by, 30% of each income payment as advised by my accountant. But im trying to work out where my savings should be by this point in the year. Is it simply a calculation of: total expected tax bill divided by 12 months, minus what I have already got saved? Probably being a bit tired (and thick!)

## Replies

• Forumite
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If I understand you correctly you are looking to check whether your savings are on track to make tax payments.

You should have collected 10 of your 12 months payments by end of January.

Assuming you pay on account you should have just paid half of your 19/20 tax bill (based on 18/19 earnings)

This will have left you with 4 months' worth of payments in your account.
• Forumite
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pramsay13 wrote: »
If I understand you correctly you are looking to check whether your savings are on track to make tax payments.

You should have collected 10 of your 12 months payments by end of January.

Assuming you pay on account you should have just paid half of your 19/20 tax bill (based on 18/19 earnings)

This will have left you with 4 months' worth of payments in your account.
I was wondering how to explain payments on account to the OP.

If this is his first year running his own business, he won't yet have paid any tax, so will be paying tax for 2019-2020 later this year, but possibly ALSO half of his projected tax bill for 2020-2021. This is sometimes A Very Nasty Shock to people.

I'd suggest talking to the accountant and checking whether they think the OP is on track for both 2019-20 tax, and any payment on account that may be due.
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• Forumite
151 Posts
Ok, I'm trying to get back on an even keel having been unable to pay my January tax bill (due to overspending /not budgeting/saving correctly) and wanting to avoid at all costs falling into the same trouble again.

Hmrc have agreed, after my paying the paltry 4k I had saved so far, a payment plan for the remaining amount owed which covers repayment of both January and July 2020 tax bills. That leaves me with just 700 in account.

So yes I'm now trying to work out what that 700 should actually be (as I'm assuming it's well less than it should be) and what I need to save per month (above the 30% presumably) going forward.

I realise I need to save x amount monthly for the sooner January 2021 bill but enough also be on track, and have enough by the time the July 2021 bill is due.

I don't know if I am coming across as rather dim, both here, and to my accountant, but when I ask them this question they just confuse me with a response that doesn't seem to be an answer, at least certainly one I can't quite fathom.

(I don't know where to turn really. This is just one part of a financial mess I am in but trying to sort out bit by bit. I tried an ifa who just tried to sell me a consolidation loan to cover this hmrc debt and my other debts which I've been strongly advised against. Tried business debt line who helped with a budget sheet but that was as far as they could go. So I'm trying to work out my overall budget best I can but need help. (a debt free wannabe post is next).)
• Forumite
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I'm not really any clearer what you are asking either.
If you post exact details:
When you started self-employment and therefore what year(s) we are discussing
do you have any other employment
what is your profit for these years
what are the tax figures you already been given after self-assessment
what have you paid so far and what do you still owe
• Forumite
151 Posts
Ok sorry I've had some answers back from my accountant who says I need to save 800 per month to have 8000 saved by the time my January bill is due (as I need more than just 30% monthly to cover it.)

So my question now is this. Previously ive been saving a percentage monthly which is good, as my income varies month on month particularly Nov/Dec when sales vastly increase. Also, given half of the total tax bill isn't due until July and therefore not all needed to be saved by January, is there another way I can account for the monthly variable income and saving the right amount month to month to reach the target by jan/July?

My thinking is my cash flow isn't great and will struggle to save 800 monthly in the quieter months. I realise I could just carry on saving 30% then hope to "top up" the shortfall on nov/Dec but this is a tad risky with the bill imminent. Any other way?
• Forumite
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Where does the 30% come from?

Your tax will be either 20% or 40% or 45% depending on your tax bracket and you will have your personal allowance assuming you don't earn money elsewhere.

I set aside a strict 20% of my monthly income but that means I normally have a bit extra when it is time to pay due to my personal allowance.

If your income is variable you either have to figure out your tax owed every month and adjust accordingly what you set aside, or work out an annual figure and average it monthly but that might mean it being tighter some months when you earn less.

The tax is always paid after you earn it, so as long as you are setting aside the correct amount it shouldn't be an issue when each bill is due.
• edited 13 February 2020 at 8:32PM
Forumite
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edited 13 February 2020 at 8:32PM
pramsay13 said:
Where does the 30% come from?

Your tax will be either 20% or 40% or 45% depending on your tax bracket and you will have your personal allowance assuming you don't earn money elsewhere.

I set aside a strict 20% of my monthly income but that means I normally have a bit extra when it is time to pay due to my personal allowance.

If your income is variable you either have to figure out your tax owed every month and adjust accordingly what you set aside, or work out an annual figure and average it monthly but that might mean it being tighter some months when you earn less.

The tax is always paid after you earn it, so as long as you are setting aside the correct amount it shouldn't be an issue when each bill is due.
have you overlooked that if OP is earning enough to have to pay income tax, then by definition he also has to national insurance. 20% income tax plus 12% NI less the respective income tax and NI thresholds gives as a rough rule of thumb the advice to set aside 30% of all gross income to cover "tax" - assuming basic rate taxpayer obviously.
As you yourself note you want to be in the position of having set aside too much, not too little, so whilst finer mathematics would show that 30% is "conservative", and a lower figure could be calculated more accurately, it also means lower risk of shortfall.
• Forumite
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Won't the percentage also depend on what sort of business you are running?
If it is a buying products to sell on at a profit, 20 or 30% of the turnover will probably be far above the tax needed as there will be considerable expenses to reduce the taxable profit.  This situation is very different for someone offering a service where the overheads are likely to be relatively small.
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