I'm self-employed. I need to have access to cash. Is there a better place for me to leave an amount whilst waiting for my inevitable tax bills?
17 June 2021
Question by Tony
I am self-employed. I save roughly 40% of my gross fees per month for tax (including both VAT and income tax). At the moment, I leave this 40% in an easy-access cash savings account that barely earns any interest. I need to have access to this cash every 3 months for VAT payments and every 6 months for income tax payments. Is there a better place for me to leave this 40% whilst waiting for my inevitable tax bills? (NB: I max out my S&S ISA each year, so an ISA is not an option.)
Answered by Adam Johnson
Your question is really one of risk management. You have a fixed liability that must be paid. If you wish to make your funds grow at a rate above inflation you will need some form of asset backed investment. This will mean an investment where the value can fall as well as rise. You would be placing funds in a position where should the value fall you would not have enough funds to cover the tax liability owed.
Typically, with investments, we would advise a minimum of a 5-year + investment horizon. This gives you the time to average out the ebbs and flows of the investment market. Over such a short time scale I do not think the risk is worth any potential return.
Furthermore, with such a short investment horizon, to have any significant impact on the return, it would require a significant increase in value. For example, if you invested in a fund grew at an average of 6% p/a but your funds were invested for 3 months you would see 1.5% return for the time invested. This modest return, whilst better than that in the bank account does not seem adequate compensation for the risk of having suffered a fall.
Additionally, there will be costs for setting up the investment, potential cost for running the investment and potential exit and tax charges. All of which will further add to the risk that the investment is worth less than the debt owed. The logical conclusion would be that you opt for a highly risky investment to try to make the exercise worthwhile, but this then further exacerbates the issues of short-term investment risk. My view is that the reward will never be proportional to the risk.
As a compromise solution, you could opt for Premium Bonds. The capital sum is secure, you will be in a prize draw and there is the chance of a tax-free prize. The money is safe and will not fall in value. It has an element of chance which might be more interesting than a simple deposit. This gives you the chance to make your money grow with no costs and no risks given the very short investment horizon.
Good luck and it is great to see the saving discipline of setting aside tax money owed in advance. This bodes well for the success of your business.
Helping deliver client outcomes is at the heart of everything Adam does. Helping clients achieve their dreams is what motivates Adam as a financial adviser, and he takes great pride in the way he has helped so many families over two decades of providing financial advice, and fifteen years running his own practice.