How Much Should I Budget for Tax This Year?
If you run a business in the UK, one of the most common (and most important) questions you’ll ask is: how much should I set aside for tax? Get it right and you’ll avoid nasty surprises. Get it wrong and cash flow can quickly become stressful.
At Blue Rocket Accounting, we help business owners plan ahead with clarity and confidence. Here’s what you need to consider when budgeting for tax this year.
1. Sole Traders: Income Tax and National Insurance
If you’re a sole trader, you’ll pay Income Tax on your profits (not your turnover). For the 2024/25 tax year, the key rates in England, Wales and Northern Ireland are:
- 20% on profits between £12,571 and £50,270
- 40% between £50,271 and £125,140
- 45% above £125,140
You’ll also pay Class 4 National Insurance on profits over £12,570, plus Class 2 contributions if applicable.
A good rule of thumb?
Most sole traders should set aside 20%–30% of their profits, and closer to 30%–40% if you’re a higher-rate taxpayer.
Don’t forget about Payments on Account. If your tax bill is over £1,000, HMRC will usually ask for advance payments towards next year’s bill, which can catch many business owners off guard.
2. Limited Companies: Corporation Tax
If you operate through a limited company, you’ll pay Corporation Tax on company profits.
For 2024/25:
- 19% for profits up to £50,000
- 25% for profits over £250,000
- Marginal relief applies between £50,000 and £250,000
This means most small limited companies should budget for 19%–25% of taxable profits.
However, that’s not the full picture. If you pay yourself dividends, you’ll also pay Dividend Tax personally:
- 8.75% (basic rate)
- 33.75% (higher rate)
- 39.35% (additional rate)
Smart planning around salary and dividends can make a significant difference to your overall tax position.
3. VAT-Registered Businesses
If your turnover exceeds £90,000, you must register for VAT. Once registered, you’ll collect VAT on sales and pay it to HMRC, minus VAT on allowable purchases.
Standard VAT rate: 20%
While VAT isn’t technically your money, it’s vital to separate it from your operating cash. Many businesses fall into trouble simply by spending VAT they later need to pay over.
4. Employers: PAYE and National Insurance
If you employ staff, you must also budget for:
- Employer’s National Insurance (currently 13.8% on qualifying earnings)
- PAYE income tax deducted from employees
- Pension contributions (if auto-enrolled)
These liabilities build monthly and must be factored into your cash flow planning.
5. Other Taxes to Consider
Depending on your circumstances, you may also need to budget for:
- Capital Gains Tax
- Student loan repayments
- Business rates
- Benefit-in-kind tax
Every business is different, which is why a one-size-fits-all percentage doesn’t always work.
A Simple Starting Strategy
If you want a straightforward approach:
- Sole trader: set aside 30% of profit
- Limited company: set aside 20–25% of profit for Corporation Tax
- Keep VAT in a separate account
- Review your position quarterly
This won’t replace proper tax planning but it will help keep things in order as best you can.
Don’t Guess - Plan Properly
Tax should never be a last-minute scramble. The earlier you understand your likely liability, the more control you have over cash flow, dividends, investments and growth.
At Blue Rocket Accounting, we don’t just file returns, we help you forecast, budget and plan strategically so there are no surprises.
If you’d like a clear, personalised estimate of what you should be setting aside this year, get in touch with our team today. Let’s make your tax bill predictable and your business future stronger.
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