How to Set Aside for Tax So It Never Catches You Out

Few things sink the stomach like a tax bill you weren't ready for. You've had a good year, the work's been steady, and then the demand lands and the money simply isn't there, because it got spent keeping the show on the road. It's one of the most common sources of stress in construction, and one of the most completely avoidable.

The bill was never a surprise to HMRC. The only surprise is to you, because the money that was always earmarked for tax felt like yours to spend. Here's a simple system to make sure it's always there.

Why tax catches contractors out

When you were employed, tax came out before you ever saw the money. Running your own firm, it's the opposite: cash lands in your account looking like yours, and the tax on it isn't due until much later, sometimes many months later, and often in lumps. VAT quarters, CIS, and your income tax or Corporation Tax all fall due on their own timetable, long after the work that created them. Spend as though it's all yours, and you're borrowing from a bill you've already run up.

The system: a separate tax pot

The whole trick is to physically separate tax money from spending money, so you're never tempted to treat one as the other. It takes an afternoon to set up and then largely runs itself.

1. Open a separate savings accountCall it "Tax". Most business banks let you open a linked savings pot in minutes. This is the single most effective step, out of sight, out of the spending account.
2. Move a slice across every time you're paidDon't wait until the bill. As money comes in, sweep a percentage straight into the tax pot. Little and often is painless; one big transfer the night before a deadline is not.
3. Use a sensible rule of thumbSet aside a percentage of your profit for income tax and National Insurance (or Corporation Tax if you're a limited company), and keep VAT separate again if you hold it. The right percentage depends on your profit level and structure, your accountant can give you a figure to work to, and it's better to over-set-aside and enjoy the surplus than come up short.
4. Automate itA standing order or an automatic "set aside a percentage" rule (many banking and accounting tools now offer this) means it happens without you thinking about it. Discipline you don't have to rely on is the best kind.
5. Reconcile to a real forecastA rule of thumb keeps you safe; a proper tax forecast makes it exact. Reviewing your likely bill through the year means you set aside the right amount, not too little, not needlessly too much.

Watch-outs that trip people up

• Payments on account. The first time Self Assessment asks for payments towards next year's bill on top of this year's, it can feel like being taxed twice in one go. Know it's coming so it doesn't wipe out the pot.
• Don't dip in. The tax pot is not an emergency overdraft. The moment it becomes one, the system's broken, that's exactly the hole you're trying to avoid.
• CIS already helps. If you're a subcontractor with CIS deducted at source, some of your tax is already being withheld, factor that in so you don't double up. And remember the VAT reverse charge means many subcontractors no longer hold VAT to set aside at all.

Get this habit in place and tax deadlines stop being dreaded dates in the calendar. The money's there, the bill gets paid, and you get on with the work, which is the whole point. It's a small piece of the bigger picture of running a firm you're in control of. See our full guide to financial control for contractors →

This article is general guidance for building contractors, not advice for your specific situation. Tax rates, thresholds and payment dates change and depend on your circumstances, always confirm the figures with your accountant.