When you make the move from being employed (especially on PAYE) to running your own healthcare practice through a limited company a lot can change. One of the biggest shocks to the system will be realising that the money coming into your business account isn’t all yours to spend and do with as you wish.
If you’ve come from an NHS background, you’ll be used to a salary hitting your account with tax already deducted. Now though? It’s 100% on you to work out how much to set aside for taxes and manage this pot properly throughout the year.
Waiting to find out what you owe is the worst possible solution to dealing with your business taxes. It leaves you scrambling when the bill does arrive, and has the potential to force insolvency or even compulsory liquidation if company cash flow is not where it needs to be. This is where the four-account system comes in — a simple, practical method we often recommend to healthcare professionals to ensure they’re not caught out by a £20,000 tax bill they never even saw coming.
Why Setting Aside Tax as a Limited Company Owner is Different to What You’re Used To
If you’re accustomed to PAYE, you’re used to receiving whatever you are owed, minus tax. It’s clean and simple. The money in your account is yours and yours alone. However, if you run a limited company, it doesn’t work like that.
The money that comes into your business account is not your salary — it’s the income your company has generated. You pay corporation tax on your company’s profits, then you pay tax on any money you want to take out as dividends.
So every pound that comes in will get taxed twice: once at the company level, then again when you withdraw it personally. If you aren’t accounting for both, you’ll end up spending money you actually owed to HMRC.
Here’s what that looks like in practice:
- Your business receives £1,000
- You pay 19% corporation tax (assuming profits are under £50k): £190 gone
- You’re left with £810 in net profit
- You take that out as a dividend
- If you’re a higher-rate taxpayer, you pay 33.75% dividend tax: £273 gone
- You actually keep: £537
That’s nearly half gone in tax. And if you’ve already spent that £463 deduction, you’ve got a problem.
How Much to Set Aside for Taxes as a Limited Company Owner
When people ask “how much to set aside for taxes” as a limited company owner, the answer has two parts:
- 20% for Corporation Tax: Set aside immediately when money comes into your business
- 35-40% for Dividend Tax: Set aside when you pay yourself dividends (if you’re a higher-rate taxpayer)
This means from every £1,000 your business receives, you should think of it as:
- £200 goes to corporation tax savings
- From the remaining £800 in net profit, if you withdraw it as dividends: £280-£320 goes to dividend tax savings
- You actually keep: £480-£520
The mistake most healthcare professionals make is only thinking about one layer of tax, not both. Let’s break down each layer in detail.
How Much to Set Aside for Corporation Tax
The first rule is simple: as soon as money comes into your business, set aside 20% for corporation tax. Don’t wait until your year-end, don’t assume you’ll remember to do it later, do it straight away.
Open a corporation tax savings account — a separate business savings account specifically for this purpose. Every time you receive a payment, transfer 20% straight into that account. Think of it as money that was never yours to begin with — because, legally, it isn’t.
Why 20% when corporation tax is 19%? Because it’s better to over-save slightly than to come up short. The extra 1% gives you a buffer for any profit fluctuations throughout the year, and means you’re less likely to be caught out by underpayment.
If you’re not doing this, you’re essentially borrowing from HMRC without realising it. And when the bill comes due nine months after your year-end, that’s when the panic sets in.
Planning for Dividend Tax
Corporation tax is just the first layer. The second layer — dividend tax — is where things get messy, because it depends on your personal income.
Here’s how dividend tax works:
- First £500 of Dividends: Tax-free (dividend allowance)
- Basic Rate Taxpayers (£12,571–£50,270): 8.75%
- Higher Rate Taxpayers (£50,271–£125,140): 33.75%
- Additional Rate Taxpayers (over £125,140): 39.35%
Most healthcare professionals we work with are higher-rate taxpayers, which means they’re paying 33.75% on dividends above £500. That’s a third of what you take out, gone.
If you’re taking £50,000 in dividends and you’re a higher-rate taxpayer, you owe around £16,500 in dividend tax. If you haven’t been setting that aside throughout the year, that bill is going to hurt when it lands in January.
So the rule is: every time you pay yourself a dividend, set aside 35–40% into a personal savings account. Not your current account. A separate savings account that you don’t touch until your Self Assessment is due.
The Four-Account System for Managing Tax Funds
The four-account system is a method we encourage to effectively manage setting aside tax funds for your healthcare practice. Here’s how the system works:
- Account One: Business Current Account. This is where all your income will land. This will include anything that comes into your business, including client payments and private work completed. As soon as money arrives into this account, you should move it.
- Account Two: Corporation Tax Savings Account. This is your dedicated corporation tax savings account where your 20% should sit, untouched. From every payment that comes into account one, 20% goes immediately into here. Then, nine months and one day after your company’s year end, when your tax bill is due, you will already have the money ready to go.
- Account Three: Personal Current Account. Where your salary and dividends will go. If you’re paying yourself a small salary (say, £9,100 a year to stay under the National Insurance threshold), that will be transferred here. Dividends should be in this account too. However, before you spend a penny of it, you must move a chunk to account four.
- Account Four: Personal Savings Account (Dividend Tax). This is where 35-40% of every dividend you take goes. You aren’t to touch this money until your Self Assessment bill is due in January. As long as you’ve been disciplined about moving money here and not spending anything throughout the year, paying your tax bill doesn’t need to be a stressful process.
It sounds simple, because it is. But not enough people actually do it. They leave everything in the one account, spend what they believe they can afford, and will then inevitably panic when the tax bill arrives.
Avoiding the Director’s Loan Trap
Here’s a common mistake we see all the time: somebody takes more money out of their company than the business has made in net profits. This creates something known as a directors loan.
A director’s loan means money you owe your company. If you don’t pay back a director’s loan within nine months of your company’s year-end, HMRC will charge the business 33.75% tax on the amount outstanding. Then, whenever you do come to pay it back (or write it off), there are more tax implications to consider. It’s all very messy, and entirely avoidable with proper planning.
When it comes to directors loans, the rule is simple: don’t ever take out more than your net profit. If your company made £40,000 in profit (post-expenses), you can take out up to £40,000 as dividends (minus the tax owed). If you take out £50,000, you’ve created a £10,000 directors loan that will need to be paid back as a matter of urgency.
How does this happen? Usually, it’s due to people who aren’t accurately tracking their profits during the year. They’ll see the funds in the business account and assume it’s fair-game. However, it’s often not. Some of it will be owed in corporation tax, and some will be owed to suppliers and other parties.
The four-account system prevents this, because you’re moving corporation tax funds aside immediately. What’s left in your business current account is a much clearer picture of what you can actually afford to take out.
Why Healthcare Professionals Struggle with This
If you’ve spent years working for the NHS or in employed positions, this whole system feels foreign. You’re not used to managing tax yourself. You’re not used to the idea that money in your account isn’t necessarily yours to spend.
Add to that the fact that many healthcare professionals are running dual income structures — some NHS contract work as a sole trader (because that’s what the pension scheme requires), and some private work through a limited company — and it gets even more complicated.
You’re juggling two tax systems, two sets of deadlines, and two completely different ways of thinking about money. It’s no wonder people get it wrong. Especially when you factor in the fast-paced and often stressful day-to-day work.
But here’s the thing: once you’ve got the four-account system in place, it becomes automatic. You’re not guessing or hoping you’ve saved enough. You know exactly where you stand at any point in the year.
What to Do Right Now
If you’re reading this and realising you haven’t been setting money aside properly, here’s what to do:
Immediate action:
- Open a separate business savings account for corporation tax if you don’t have one already.
- Open a separate personal savings account for dividend tax.
- Work out roughly what you owe for this year and start putting money aside now.
Quarterly action:
- Every three months, check your profit and loss.
- Make sure 20% of your profit is sitting in your corporation tax savings account.
- Make sure 35–40% of any dividends you’ve taken is sitting in your personal savings account.
Annual action:
- Work with your accountant to finalise your corporation tax bill.
- File your Self Assessment and pay your dividend tax on time.
- Reset your accounts and start again for the new year.
If you’re not sure where you stand or you’ve been taking money out of your limited company without tracking it properly, we can help. At Kays Accountants, we work with healthcare professionals across Manchester, the North West, and the wider UK who are navigating exactly this transition. We’ll help you understand what you owe, set up your corporation tax savings account properly, and avoid the stress of unexpected tax bills when you’re taking money out of your limited company.
You can book a free consultation here, or just give us a call if you’d rather talk it through: 0161 399 8516.