Putting funds aside for company year tax returns - 1/4th of earnings is OK or 1/3rd?

[aaru]

HI,
My ltd company’s first company tax year is due in couple of months.
I am putting funds in to reserve for tax returns. Some suggested that ¼th of earnings is fine and some suggested it is better to keep 1/3rd of earnings.

Which one is correct?

Thanks for any help or advice in advance.
-BA

[Danbro]

Danbro Accounting Limited

Hi BA,

You really need to put aside for 3 potential taxes, PAYE / Corporation tax and potential personal tax.

PAYE - This is tax on salary so if you have a low salary this will be minimal and you will probably pay this monthly / quarterly so you should pay as you go along with this

Corporation Tax - This will normally be your main tax if you are outside IR35, this is based on your 'profits' and will be charged at 20% up to 1/4/08 and 21% thereafter.

Your profits are basically Sales less expenses (excluding Dividends)

Obviously without knowing your expenses I can’t comment on what your corporation tax will be to then give you a percentage.

Personal Tax - usually just 25% tax on dividends falling inside the higher rate tax bracket, again difficult to quantify without the figures.

Speaking from experience though, clients outside IR35 would normally need to save 15% of your sales for Corporation tax and 5% for personal tax, just on the balance of the clients I look after.

Hope this helps

Thanks

[aaru]

Thanks Danbro,
That is really helpful.

[Nixon Williams]

HI,
My ltd company’s first company tax year is due in couple of months.
I am putting funds in to reserve for tax returns. Some suggested that ¼th of earnings is fine and some suggested it is better to keep 1/3rd of earnings.

Which one is correct?

Thanks for any help or advice in advance.
-BA

This is a practice I would avoid.

If you only withdraw what has been calculated you never run the risk of having an overdrawn director's account and the issues that brings with it.

To give a percentage to save for tax can at best only ever be a simple guide. Anyone who uses a "hand on" accountant will be able to calculate fore them what they take in terms of salary, expenses, dividends etc.

It is very easy to lose track of where you are when taking round sums and I would strongly caution against it.

Alan