Stop Borrowing to Pay Tax: There’s a Smarter Way – apply PROFIT FIRST principles

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Stop Borrowing to Pay Tax: There’s a Smarter Way – apply PROFIT FIRST principles

You’ve probably seen the ads, well I received a few in the last 3 months

“Spread your Corporation Tax over 12 months!”
“Finance your next VAT payment!”

Tempting? Maybe.
Smart? Not really.

Let’s be clear—VAT and Corporation Tax were never your money to spend in the first place. Borrowing money to cover these taxes is like taking out a loan to return a borrowed coat. You’re just digging a deeper hole—and paying interest on top.

So what can you do instead?

Let’s look at some practical, Profit First-style strategies to make sure your tax bills are covered without panic, loans, or a last-minute scramble.

4 Practical Ways to Avoid Borrowing for VAT

  1. Create a Dedicated VAT Pot and Use It Regularly
    Set up a separate bank account or a pot/space (like in Starling, Monzo, or Revolut). Each time you get paid, move the VAT portion of your sales into it—before you even think about spending. This ensures that when the VAT bill arrives, the money’s ready and waiting.

  2. Implement Profit First Percentages for Every Pound You Earn
    Don’t just separate VAT—split all income into purpose-driven pots as it comes in. With Profit First, every £1 gets divided: a portion for profit, owner’s pay, expenses, and yes—tax. This means you’re never surprised by a tax bill because you’ve already been preparing for it.

  3. Use a “Smaller Plate” for Expenses
    The Profit First method intentionally limits what you think you can afford. By putting away your VAT and other allocations first, your operating expenses are based on what’s left. This forces smarter spending decisions and stops VAT money from being “accidentally” spent on something else.

  4. Review Spending Monthly and Adjust
    Not sure where the money’s disappearing? Block out an hour monthly to review your expenses. You’ll likely spot subscriptions you forgot, underused tools, or impulse buys that add up. Redirect those savings straight into your tax or profit accounts. If your spending is lean, your VAT pot doesn’t have to bail you out.

1 Create a Dedicated VAT Pot and Use It Regularly

  • Open a Separate Tax Account (or Bank “Pot”)
    Most modern banks like Starling, Monzo, and Revolut let you create separate spaces or pots. Set one up just for VAT. It’s like putting the tax money behind a glass screen—safe, visible, but out of temptation’s reach.

  • Know Your VAT Rate on Sales
    Look back over the past 12 months. What % of your total income (including VAT) was owed to HMRC? For most VAT-registered businesses, it’s somewhere between 16%–21%, depending on your costs. Know your number.

  • Transfer That % As You Go
    Each time you get paid, move that VAT percentage straight into your tax pot. If you invoice £1,000 + VAT, that’s £200 for the VAT pot. Treat it like a non-negotiable bill—because it is.

  • Feel Like It’s “Too Much”? Track the Leaks
    If you’re constantly short on VAT, it’s not because you owe too much—it’s likely because something else is silently draining your cash. Software subscriptions? Unused office space? Fancy client lunches? We can help you find the leaks and plug them.

    For example, the calculation can look like the one below, and it leads to 14% being put aside from money received.

    VAT Sales SALES incl VAT
    q 1      4,507.46         26,331         31,597
    q 2      4,681.90         26,824         32,189
    q 3      3,998.29         22,489         26,987
    q 4      3,246.45         25,060         30,072
    TOTAL   16,434.10       100,704       120,845

    14%

    If a VAT % calculator helped, you can download it here

2 Implement Profit First Percentages for Every Pound You Earn

  • Split Every £1 with Purpose
    Before you spend a penny, divide your income into accounts for Profit, Owner’s Pay, Tax, and Operating Expenses. This builds in financial boundaries—so tax money is always accounted for.
  • Allocate Based on Real Numbers
    Start with baseline percentages: maybe 15% for tax, 30% for expenses, 5% for profit. These will vary by business type. Review and tweak them quarterly based on actual income and costs.
  • Automate the Transfers
    As soon as income hits your main account, move the percentages to their pots (you can even set this up with automation rules in banks like Starling). No thinking, no forgetting.
  • Review and Adjust Quarterly
    Profit First is a living system. Every 90 days, assess what’s working and where you can increase savings or reduce waste. Over time, you’ll build stronger buffers—including for tax.

3 Use a “Smaller Plate” for Expenses

  • Subtract the Tax First
    Treat tax like a fixed cost. Once VAT and other taxes are allocated into their own pots, you’ll see the true amount you have to spend. This helps avoid the illusion of having more than you do.
  • Shrink What’s Left, Spend What’s Smart
    What’s left in your operating expenses account is your “plate.” If it’s smaller than before, that’s intentional. You’ll naturally become more selective about where the money goes.
  • Use Parkinson’s Law to Your Advantage
    Parkinson’s Law says work expands to fill the time (or money) available. If your expense account shrinks, your business will creatively adjust. You’ll still get what you need—just leaner.
  • Say No to “Just in Case” Spending
    If you’re about to dip into your VAT money to “cover something quick,” stop. That’s the trap. The smaller plate approach removes this temptation—because it’s no longer on the menu.

4 Review Spending Monthly and Adjust

  • Schedule a Monthly Money Date
    Book a non-negotiable 30–60 minutes once a month to sit down with your accounts. No distractions. Just you and your numbers.
  • Look for Creeping Costs
    Subscriptions, apps, unused memberships—these often slip under the radar. Ask: Am I still using this? Is there a cheaper option? Cancel what you don’t need.
  • Check If Spending Matches Your Priorities
    Are you investing in things that help your business grow? Or just spending to feel “busy”? Realign your spending with your actual goals—and shift the savings to your VAT or tax pot.
  • Redirect the Waste
    Found an extra £200 this month? That’s not extra—it’s future VAT or profit. Move it immediately into your tax or profit account and pat yourself on the back. You’re winning.

Don’t Let VAT Become a Crisis

If you’re using VAT money to keep the lights on, it’s time for a reset. Profit First isn’t about restriction—it’s about clarity. Knowing where your money’s going is the first step to keeping more of it.

Borrowing to pay VAT is a warning light, not a solution. Profit First flips that pattern on its head: You pay yourself, save for tax, and build profit first—then spend what’s left. It’s not magic. It’s just a method that works.

Want help setting up your own VAT-saving system? Let’s chat.

Need help setting this up? We do this all the time. Pop us a message, and we’ll show you how to build a system that works for your business.