Find the cash you can actually spend by separating tax, customer deposits, delivery costs and near-term bills from the balance shown by your bank.
Short answer: Your bank balance includes cash that may already belong to HMRC, suppliers, employees or customers whose work you have not delivered. Reconcile it every week by subtracting recorded tax provisions, delivery commitments and bills due before your next reliable receipts. The remainder is spendable cash, and if that number is negative, stop discretionary spending and address the dated shortfall before the tax deadline.
The bank tells you how much money is in an account. It does not tell you how much of that money is economically yours to spend. A £30,000 balance can conceal £28,000 of obligations, while a £7,000 balance can be adequate if the major liabilities have already been paid.
The usual advice to “save a percentage for tax” is too crude for an operating decision. The appropriate amount depends on your legal structure, taxable profit, reliefs, prior payments, payroll, VAT position and jurisdiction. Use current records and an accountant's estimate where needed, then reserve a cash amount against named liabilities.
Use the Spendable Cash Reconciliation
The Spendable Cash Reconciliation converts the balance you can see into the cash you can safely commit. It is a bridge, not an accounting statement: spendable cash = cleared bank cash - tax provisions - delivery commitments - bills before reliable receipts
Work through the deductions in this order so you do not count the same obligation twice.
- Collected or deducted taxes: What belongs here: VAT collected, payroll deductions and other amounts administered for the authority; Evidence to use: Tax records, payroll reports and filed returns; Common mistake: Treating all customer receipts as revenue you can spend
- Profit-based tax provision: What belongs here: Current best estimate of tax on profits not yet paid; Evidence to use: Up-to-date accounts and advice from your accountant; Common mistake: Reserving from turnover without checking taxable profit
- Undelivered customer commitments: What belongs here: Cash received for work or goods you still have to provide; Evidence to use: Order records, job costs and deposit terms; Common mistake: Calling every customer deposit free cash
- Near-term operating bills: What belongs here: Supplier, wage, rent, finance and other unavoidable payments due before dependable receipts; Evidence to use: Aged payables, payroll and contracts; Common mistake: Looking at month-end totals instead of clearing dates
Start with cleared cash, not the accounting balance
Reconcile the bank first. Exclude uncleared card receipts, cheques, disputed transfers and an unused overdraft. Add separate business reserve accounts because they are part of total cash, then label amounts already ring-fenced for tax or another obligation.
Identify tax cash by liability, not by guesswork
List each tax separately with its amount, evidence date and payment date. For a UK business, that might include VAT, PAYE-related amounts, Self Assessment or Corporation Tax. Do not merge them into a single round-number reserve because they arise from different records and fall due on different schedules.
Official UK guidance says Self Assessment payments are normally due on 31 January, with a further payment on account potentially due on 31 July. Where payments on account apply, each is generally based on half of the previous year's relevant tax bill, so a founder's first substantial January payment can include both a balancing amount and an advance payment. Check the amount shown in your HMRC account rather than estimating from the deadline alone.
For a UK limited company, Corporation Tax is usually due nine months and one day after the accounting period ends, while the Company Tax Return deadline is normally later. That separation catches owners out because filing and payment are different events.
VAT and payroll have shorter rhythms. GOV.UK says an online VAT return and payment are usually due one calendar month and seven days after the accounting period. It also states that monthly PAYE paid electronically is generally due by the 22nd of the following tax month. Verify your own periods and account because exceptions and alternative arrangements exist.
These are UK working rules, not universal advice. Tax requirements vary by country, legal structure and sector, and official guidance can change. Confirm material calculations and deadlines with HMRC and a qualified local accountant or tax adviser.
Reserve the cost of promises you have not fulfilled
A customer deposit improves the bank balance immediately, but it may finance materials, labour, subcontractors, refunds or remedial work later. Subtract the cash still required to fulfil the order, not automatically the entire deposit.
Suppose a customer paid £10,000 upfront and the remaining direct delivery cost is £6,400. The immediate operational commitment is at least £6,400, plus any refund exposure or tax attached to the transaction. If your contract makes the full deposit refundable until a milestone, the restricted amount may be higher. Review the actual terms.
This distinction stops you from spending tomorrow's delivery budget on today's equipment purchase. It also reveals underpriced deposits. If a 30% deposit does not cover the cash required before the next stage payment, the payment schedule is forcing you to finance the customer.
Deduct bills by timing
Subtract unavoidable cash outflows due before your next dependable receipts. Use clearing dates from payroll, direct debits, supplier terms and finance agreements. Include owner withdrawals only when they are genuinely planned and affordable.
Do not subtract a bill twice merely because it appears in both a job-cost estimate and aged payables. Mark each obligation with its source. For example, a supplier invoice already included in the remaining cost of a customer project should stay in the delivery commitment or near-term bills line, not both.
Worked example: BridgeRow Office Fit-Out
BridgeRow Office Fit-Out sees £31,800 across its business bank accounts and is considering a £10,000 equipment purchase. The owner completes a Spendable Cash Reconciliation using current bookkeeping, payroll records, job-cost schedules and an accountant's tax estimate.
- Cleared bank cash: Amount: £31,800; Running spendable cash: £31,800
- VAT provision from current records: Amount: -£6,200; Running spendable cash: £25,600
- PAYE-related provision from payroll: Amount: -£3,900; Running spendable cash: £21,700
- Corporation Tax estimate from current accounts: Amount: -£7,400; Running spendable cash: £14,300
- Remaining delivery costs funded by customer deposits: Amount: -£8,000; Running spendable cash: £6,300
- Supplier bills due before the next reliable receipt: Amount: -£4,600; Running spendable cash: £1,700
The calculation is £31,800 - £6,200 - £3,900 - £7,400 - £8,000 - £4,600 = £1,700 of spendable cash. The bank balance looks strong, but £30,100 is already allocated.
Buying the £10,000 equipment would create an immediate commitment gap of £10,000 - £1,700 = £8,300, before allowing any operating buffer. The equipment may still be commercially sensible, but BridgeRow must change the timing, arrange suitable finance or generate additional cleared cash. Calling the purchase affordable because £31,800 is in the bank would be wrong.
The interesting result is that no single tax bill caused the problem. Several legitimate obligations accumulated inside one apparently healthy balance. The reconciliation makes each claim visible before a deadline exposes it.
Separate the money operationally
Once you have calculated the provisions, move tax reserves to a separate business savings account if your banking arrangements allow it. This reduces the risk of reading reserved cash as available.
Transfer amounts based on updated records at a fixed rhythm, usually weekly for a young business with volatile sales. Reconcile the reserved balance against the latest liability at least monthly and after each filed return or accountant adjustment. If the provision falls, understand why before releasing cash.
Some advisers advocate one fixed tax percentage from every receipt because it is simple. Simplicity can improve saving discipline, but my view is that it should only be a temporary collection rule. A recorded liability reconciliation must replace it before you make spending decisions, otherwise you can reserve too little or immobilise cash the business needs.
Related guides
What to do before your next purchase
First, reconcile every business bank account today and write down cleared cash. Gather your tax accounts, payroll reports, current management figures, aged supplier bills, customer deposits and remaining job costs. Allow 30 minutes.
Next, complete the four deductions in the Spendable Cash Reconciliation. Give each amount an evidence source and a payment or review date. Ask your accountant for an updated estimate where taxable profit or reliefs make the provision uncertain. Allow 45 minutes.
Finally, compare the result with your planned purchase and operating buffer. Move the reserved amounts out of day-to-day view, update your 13-week forecast, and cancel or reschedule any discretionary commitment that would push spendable cash below the buffer. Repeat the reconciliation every Friday for the next eight weeks.
Frequently asked questions
How much of each payment should I put aside for tax?
Use a percentage only as a temporary saving rule, not as the final answer. The amount you need depends on what the payment represents, whether VAT is included, your allowable costs, taxable profit, legal structure, reliefs and prior payments.
Start from up-to-date records and ask a qualified accountant for an estimate when the position is material or unclear. Then compare the estimated liability with cash already reserved. A service business with few costs and a product business with heavy stock purchases can receive the same £10,000 but require very different profit-tax provisions.
Is money in a separate tax account still part of business cash?
Yes, it remains business cash in a legal and accounting sense, but you should classify it as restricted for operating decisions. Include the account when reconciling total cash, then subtract the matching tax provision before calculating spendable cash. This prevents accidental double counting.
If the reserve exceeds the latest evidenced liability, do not release the difference automatically. First check whether another payment, such as a payment on account, VAT period or payroll amount, is approaching. Separate accounts improve behaviour, but they do not prove that the amount saved is correct.
Why was my first Self Assessment payment larger than expected?
It may include both a balancing payment for the year just ended and a payment on account towards the next bill. HMRC explains that payments on account are advance payments towards your tax bill and are generally made twice a year.
Check your Self Assessment statement for the components and dates rather than assuming the whole amount relates to past profit. Exceptions apply, and payments on account can sometimes be reduced when you reasonably expect a lower bill, but reducing them too far can lead to interest. Get qualified advice if the estimate is uncertain.
Can I use VAT money temporarily and replace it later?
You can physically spend cash in a general account, but doing so creates a funding risk and does not reduce the VAT liability. Treat the provision calculated from your VAT records as unavailable unless a forecast shows exactly how it will be replaced before payment, with a credible source rather than an unsigned sale.
My view is that routine use of VAT cash to fund operations is a warning that pricing, margins, working capital or payment terms need attention. VAT schemes and recoverable input tax affect the amount due, so verify the figure from your records and current UK guidance.
What if my customer deposit is non-refundable?
Non-refundable does not mean cost-free. Reserve the cash still required to complete the promised work, including materials, labour, subcontractors, delivery and a reasonable allowance for rectification where appropriate. Check the contract and applicable consumer law before relying on a non-refundable term, because enforceability varies by customer type and circumstances.
If the remaining payment arrives only after completion, your deposit must cover the peak delivery cash requirement or you will finance the gap. Legal and consumer requirements vary by country and sector, so obtain advice from a qualified local professional for specific terms.
What should I do if I cannot pay HMRC on time?
Contact HMRC as soon as you know there is a problem, keep required records and filings current, and quantify what you can pay and when. GOV.UK provides an official route for businesses and individuals having difficulty paying HMRC, including information about possible payment arrangements.
Do not promise money to another creditor merely because their pressure is louder without understanding the consequences. Tax debts and enforcement are high-stakes matters, so discuss your circumstances promptly with HMRC and a qualified insolvency practitioner, accountant or tax adviser. Eligibility and terms depend on the facts.
Does a profitable business always have enough cash for tax?
No. Profit records economic performance over a period, while the tax payment requires cash on a particular date. Customers may not have paid, stock may have absorbed cash, loan principal and equipment purchases can reduce the bank without matching profit expenses, and advance customer receipts can create cash before profit is earned.
Reconcile both measures. If profit is healthy but tax cash is missing, inspect debtor collection, stock, owner withdrawals, capital spending and debt repayments. If both profit and cash are weak, reserving alone will not solve the underlying margin or cost problem.
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