Save Like A Squirrel

Save Like Squirrels: The Importance of Financial Preparedness for Businesses

The early months of a new tax year are an ideal opportunity to regroup and replan. Whether you run a limited company or operate as a sole trader, the need to save for taxes or a rainy day is just as important.

As a general rule of thumb, if your profit as a sole trader is over £12,500 then it is a good idea to put away 30% of that profit into a savings account.  If you decide to put 30% of sales away, you will likely finish the year with money to spare, but this will leave less for you to take throughout the year.

There is a small amount of breathing space before personal tax incurs a payment on account, which is a payment towards the next tax year.  This can be a killer if not planned for, especially in the first year.  For this reason, we suggest saving 30% instead of 20% of profits, as the 20% will cover taxes, and the additional 10% will go towards the obligatory payment on account, which is collected by HMRC and offsets the next year’s tax.  If you are a higher-rate taxpayer, you will need to save more to allow for the percentage of your income that falls into the higher-rate tax bracket.

For a limited company, corporation tax is paid on any profit made. If you make £1, you need to set aside 20p of that £1 for tax. The corporation tax rate is 19% for profits under £50,000, but it’s worth rounding it up when saving for tax.

In addition to corporation tax, if your business is VAT registered, then it is wise to set money aside for this as well.  The VAT system is such that your business becomes a micro tax collector for HMRC, charging tax on the value you have added to the product or service and then passing this back to HMRC.  This is then paid out one month and seven days after the VAT quarter end for quarterly returns.  For this reason, the VAT portion of sales ideally needs to be saved into a separate account.

The other reason to save is for the emergency funds.  If sales dry up, as they sometimes do, you need to make sure there are enough coffers in the tin to pay your suppliers.  This also allows you to have a pot ready for times of investment, such as equipment or staff.

By adopting the diligent saving habits of squirrels, businesses cannot only survive but also thrive even in challenging times, building a secure and stable financial future.

There are now better saving rates available to businesses. If you are with Mettle, they offer a savings pot with a small interest rate. You can easily squirrel away some funds into that or open a new account with a good interest rate with a different bank. Aldermore is a good one to look at but there are lots of options. Make sure any savings account is in the business name, especially if you run a limited company. Otherwise, money moved into a savings pot in your personal name will be treated as dividends as it has been moved out of the company.

If you want some help managing cashflow, please don’t hesitate to let me know. We can do this for or with you. It is important to keep tabs on cash, to make sure you can pay your bills and meet your tax obligations.