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Tax reserve checklist

The most common cause of small business cash crises is treating tax money as operating money. A simple checklist, applied every time cash arrives, fixes this. Use it for the first three months until it becomes habit.

Taxes
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When to use

  • Every time a customer payment lands in your account.
  • Every time you draw money from the business as the owner.
  • At month end, as a final reconciliation check.

Examples

Per-payment checklist

WHEN A CUSTOMER PAYMENT ARRIVES

Step 1 — Identify the components
  ☐ Net amount (your revenue)
  ☐ VAT or sales tax included in the payment
  ☐ Any payment processor fee already deducted

Step 2 — Move the tax-collected portion immediately
  ☐ Transfer the VAT or sales tax to a separate account today
  ☐ Do not leave it in the operating account "for a few days"

Step 3 — Reserve for income / corporate tax
  ☐ Apply your reserve rate (e.g. 25%) to the net revenue
  ☐ Transfer that amount to the same separate account
  ☐ Note the source invoice in the transfer reference

Step 4 — Spend only what is left
  ☐ The remaining balance is operating cash
  ☐ Treat the tax account as untouchable until the filing date

WHEN YOU PAY YOURSELF (sole trader / owner draw)

  ☐ Apply your personal income tax / NI / social charges rate
  ☐ Reserve that portion to the tax account before spending the rest
  ☐ Track total drawn for the year — needed at filing time

MONTH-END RECONCILIATION

  ☐ Compare tax-account balance vs total tax owed (VAT + estimated income tax)
  ☐ Top up if under-reserved
  ☐ Recalibrate reserve rate if you have been off by more than 5% for two months running

Print this and stick it next to your bookkeeping screen for the first three months. After that the steps become muscle memory.

Suggested reserve starting rates

These are starting points, not advice. Refine after the first full year of trading.

Sole trader / freelancer (low to mid income):
  - Income tax + NI / social: ~25–30% of net revenue
  - VAT (where registered): pass-through, reserve 100% of collected amount

Limited company / corporation (low to mid profit):
  - Corporate tax: ~20–25% of expected profit
  - Owner salary / dividends income tax: depends on personal extraction strategy

US LLC / S-corp (illustrative):
  - Federal + state income tax: ~25–35% of net profit
  - Self-employment tax (where applicable): ~15% of net profit

Always confirm rates with a qualified professional in your jurisdiction.

These rates are deliberately conservative. Over-reserving is recoverable; under-reserving is a cash crisis.

Tips

  • Use a separate bank account, not a sub-ledger in your head. Friction prevents accidental spending.
  • Reserve at the moment cash arrives, not at the moment you remember to.
  • Recalibrate the reserve rate annually — tax rates and your own income mix change.
  • Treat VAT or sales tax differently from income tax — they are pass-through, not yours.
  • Top up at month end if the tax account is short. Do not wait for filing day to discover it.

Frequently asked questions

What if I cannot afford to reserve the full amount?
Reserve what you can, even if it is half the right rate. Partial reserve is far better than no reserve. Then look hard at the spending side — tax is a fixed cost of trading, not a discretionary one.
Should the reserve account be a savings account?
Yes if it pays interest, no if accessing it requires friction that delays your tax payment. A simple separate current account is fine for most small businesses.

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