How much you can take out of your business each month

Out of 3,630 collected, you may only be able to take 1,650. How to work it out and avoid a nasty tax surprise.

Not everything you collect is yours

If you are self-employed or run a small business, the money that lands in the account feels like yours. But part of it belongs to others: the sales tax (such as VAT) you charge customers, the business's costs and the income tax and contributions you will owe on your profit.

An example with numbers

A hypothetical month in which you collect 3,630, of which 630 is VAT you will have to pay over:

• What really belongs to the business: 3,000.
• Business costs: 800. Your profit is 2,200.
• Reserve for tax and contributions on that profit: if you set aside 25%, that is 550.

You can take out 1,650: 45.5% of what you collected. If you also leave a 200 cushion in the business, 1,450.

The reserve percentage is an example. What you will owe depends on your country, your business structure and your income: work out yours with your adviser and adjust it each year.

The costly mistake

If you spent everything left after paying costs (2,830), you would be 1,180 short when the VAT and tax bills arrived. It is one of the most common causes of cash problems for freelancers: the money was spent months before the tax bill came.

A simple system

1. Two accounts: one to collect and pay for the business, another for your personal spending.
2. When you are paid, move the VAT and your tax reserve percentage to a separate pot. That money is not touched.
3. Pay yourself a fixed salary each month, not whatever is in the account. In good months, the surplus stays as a cushion for the bad ones.
4. Check every quarter that the reserve covers what you will owe.

Work out how much you can take with the pay yourself calculator and, if you are setting prices, review your hourly rate.

Run your own numbers