One of the most common questions business owners ask is:

“How much, or what percentage, should I be saving for Corporation Tax and VAT?”

The honest answer is that there is no single fixed formula. But the good news is that there are sensible rules of thumb that work well for most businesses and help you avoid nasty surprises from HMRC.

Corporation Tax: What Should You Save?

Corporation Tax is charged on your company’s profits, not on turnover.

In the UK, Corporation Tax currently ranges from 19% to 25%, depending on the level of profit and other factors. Most small companies fall somewhere within this range.

A simple, safe rule of thumb is to set aside around 25% of your profits for Corporation Tax.

This is slightly conservative, but it gives you breathing room and avoids under saving.

Your actual Corporation Tax bill depends on things like:

  • Salary vs dividends
  • Allowable business expenses
  • Capital allowances
  • Losses brought forward
  • Whether you have associated companies

Because of this, Corporation Tax cannot reliably be calculated as a percentage of turnover. But 25% of profit is a sensible starting point for most directors.

To get an accurate profit figure you will need management accounts.

VAT: How Much Should You Put Aside?

VAT often causes confusion, but the key thing to remember is this:

VAT is not your money. You are collecting it on behalf of HMRC.

If you are on standard VAT accounting, the safest approach is to set aside the VAT you charge your customers, deduct the VAT you reclaim on expenses, and save the difference for your VAT return.

If you want a quick rule without calculating every invoice, many businesses find it works well to save around 15% to 17% of gross sales.

This works because you charge 20% VAT, but you usually reclaim some VAT on costs.

If you are on the Flat Rate VAT Scheme, the percentage you owe HMRC depends on your trade category and whether you are classed as a limited cost trader.

In that case, you should save the exact Flat Rate percentage you pay to HMRC.

A Simple Stress Free Approach Many Businesses Use

To keep things easy, many company directors do the following:

  • Move VAT into a separate savings account as soon as it is received
  • Set aside 25% of profits each month for Corporation Tax

Some prefer an even simpler method.

They save 30% to 35% of all money coming into the business into a tax savings account, then adjust once the final figures are known.

This approach is cautious, but it is very effective at avoiding cash flow shocks.

Why Accountants Always Say It Depends

From a technical perspective, tax does depend on individual circumstances.

But in real life, under saving causes stress and penalties. Over saving just means you have extra cash later. HMRC will not penalise you for being cautious.

That is why having a clear saving habit is often more important than being perfectly precise.

Need a More Accurate Figure?

The best percentage for you depends on your business structure, your VAT scheme, and your profit margin.

If you are unsure, a quick review with your accountant can give you a tailored figure and peace of mind that you are setting aside the right amount.