One of the most common scares when starting out as self-employed isn’t paying taxes, it’s not having the money set aside when it’s time to pay them. The problem is almost never a tax problem, it’s a cash flow problem.
Why you need a reserve
When you collect an invoice, part of that money was never really yours: the VAT you charged isn’t income, it’s money you’re managing on Hacienda’s behalf until you settle it via Modelo 303. If you mix it in with your day-to-day money, you can be short on cash at quarter-end even if the business is doing fine.
A rough reference
As a general rule, it’s reasonable to set aside between 15% and 30% of your gross turnover, depending on how many deductible expenses you have and your specific situation. It’s more useful to treat it as two separate pots:
- VAT: set it aside as soon as you collect it. It isn’t an estimate, it’s an exact figure you already know at the moment you invoice.
- IRPF: a percentage of your net profit (see how quarterly IRPF is calculated), which is an estimate until we close out the quarter.
How to do it without overcomplicating things
A separate account you automatically transfer a percentage into every time you invoice is the simplest way to make sure the reserve doesn’t depend on your own discipline. Checking the real figure with us every quarter, instead of estimating by eye, avoids both coming up short and setting aside too much and leaving money sitting idle.
Setting money aside is not the same as planning
Setting aside a percentage protects you from the quarterly payment, but it doesn’t solve uneven income through the year. If you invoice very unevenly month to month, it’s also worth looking at how to spread that income out, so you don’t reach year-end with surprises. On top of that, it’s what determines how much of a reserve you actually need in the slow months.
If you are thinking of registering, here is the complete guide to registering as self-employed: when, how and what it costs with us.