Saving for Tax (aka Vaults)

Intro
We want to make being self-employed easier than being employed. When you’re employed, tax gets taken from you before you get paid, which simplifies your budgeting quite a lot.

But getting paid before tax makes budgeting hard. You have to set aside typically 20-30% of your income for tax bills that you pay every 12 months (or 6 months on payments on account).

It’s common for people to set aside 20% or more of the income they get into a separate account, ready for their year end tax bill. It’s also pretty common for people to not set aside the money, and get caught out at the end of the year.

It’s a similar story with corporation tax for limited companies, or quarterly VAT bills for VAT registered businesses.

How we’re approaching this
This has been a long time coming. It’s one of our 2019 regrets that we didn’t get this done. And so we are now going to work on this after we’ve tackled Reports on your income, expenses, profit and more.

There are two elements we want to tackle:

1 - Setting your money aside
What we’d like to do is set up an automated saving feature that identifies when you’ve been paid and how much, and then deducts a % of your choosing and transfers it to a Coconut Vault, or other savings account of your choosing.

Once you’ve set up this rule, you can then just let it run without having to worry about moving money around every time you get paid.

2 - Storing the money
We can create sub-accounts that let you move money in and out of them. This means that every time you get paid, you can move a portion across of your choosing, for safe keeping.

This would be much like a Coconut current account, meaning it would be facilitated by our banking partner, PPS. It’s what’s called an e-money account and your money is not put at risk (ie it’s not lent out) and as such there’s no interest on it.

We think a better solution over time will be to let you move money into other accounts besides this one, that do get interest, that you can then connect to Coconut.

Our questions

  • Do you save for tax today?
  • How do you save for tax today?
  • Where do you send the money to?
  • What % do you set aside?
  • Have payments on account ever caught you out?
  • Do you want to set aside money into Coconut account, or into a separate account with another bank?
  • How do you like the automated saving rules idea?
  • What do you think is more useful for you - auto-saving to an external account, or manually moving money into a Coconut vault?
5 Likes

Hey Adam!

I can’t wait for Vaults to come to Coconut, I am super excited for it,

I currently don’t set any money aside for the LTD. I just let it all accumulate in the one account Coconut provides, (So I look very rich, it’s great).

I have a seperate spreadsheet which calculates each monthly income and then works out a rolling tax ‘pot’ as such so I know the true amount in my account.

For my personal assessment I simply put X away a month into a Monzo pot.

As I said I’m looking forward to vaults, and having the ability to coconut to take a % of monthly income and move into a vault would be absolutely fantastic!

4 Likes

Hi Adam,

Looking forward to utilising this feature. I like the features you have listed above and I am not sure if you want us to choose 1 of the methods in that list but, if possible, it would be great to have all of those features and allow each user the flexibility to choose which works best for them.

I can see the ‘automated savings idea’ being a good fit for me, as this is something I do manually at the moment, but until I use it, I don’t know if it will be the solution for me. At the moment, I set aside 20% of all income I receive into a separate current account, but having it automated would be so useful and having a vault within Coconut would be good, but I love the idea of being able to choose where the money is moved to, whether that be a separate account or a vault in Coconut. Ideally, I should store the money in a savings account to get some interest over the year, but that’s something I still need to look into.

Hi Coconut.

As a user from the very beginning I have always loved using the app, its super simple and streamlines my accounting. I have only been freelance/self employed for 4 years so fairly new to it all really, however Ihave always been pleased with the ease of use and supprt provided by your team.

I have to say that this future development will be amazing. When I first started, I was withdrawing 20% each time I get paid from a job, and putting it into a savings pot in my Monzo account. Here it is untouched and safe for me to use at the end of each year.
However more recently I have begun micro investing instead. I use a platform called Plum, which has a roundup feature. I have found (obviously!) that investing brings me a much higher ROI on my income tax savings than regular saving (but obvioulsy with additional risks of future loss). I guess that what I would like to see are developments in both or simply a tax pot where I can just move it across, however the appeal for me as a micro invester is the added ROI which I have been getting YOY since 2017.

Looking forward to hearing of any future developments.

I am so excited for the Vaults feature!!

I currently put away 30% to cover tax, national insurance and student loan repayments. All in all, around 30-35% should cover the tax bill for me.

I currently send the money to my Monzo account where it sits in a savings pot there but I’d sacrifice the interest I earn on the savings in return for an automatic solution ANY DAY! However, if I could move the money automatically into an external savings account too, that would be pretty decent!

Loving the updates, can’t wait to see more!

PS I’d love to beta test the new functionality :wink:

Automated saving of a percentage for tax would be great. In my situation I have two pensions plus my income from my self employment which puts me near enough in the higher tax bracket for my income from self employment (which I pay into Coconut). Being able to choose the correct amount of tax to save would be great (eg 40%).

Excited for this!

I’m a fan of the Profit First method, which includes setting aside money for tax into a separate account, among other things. In the past, I’ve done this with just a load of Natwest current accounts, but I’d love to be able to do this all internally with Coconut. I’m sure you’ll have other people using PF or a similar method here, so I’m sure vaults will get plenty of love from the community.

From my point of view, at a minimum I’d just need the option for multiple vaults, though being able to automate it all would be fantastic. For anyone who doesn’t know the system, the most basic rundown is that any incoming money arrives in an ‘income’ account, and from there is distributed to where you need it, profit, tax, personal wages, business expenses, whatever you need. You can do this all by hand (which I did) twice a month, and the writer of the book also suggested having some long term hold accounts at other, disconnected banks that you can’t easily touch for storing money for tax or anything else you don’t want to be tempted into pinching from to cover a cost, especially the tax!

I have no idea how easy or hard any of this is to implement, but I’m happy to get involved in the conversation in more depth should my own take be useful to others!

1 Like
  • Do you save for tax today?
    Yes, I transfer a percentage of my income into a Nationwide account

  • What % do you set aside?
    Depends, but on average about 20%

  • Have payments on account ) ever caught you out?
    No, but my husband is a tax accountant so he warned me the year I had to start paying them! (THANK GOD!)

  • Do you want to set aside money into Coconut account, or into a separate account with another bank?
    I’d much prefer to be able to do it in Coconut

  • How do you like the automated saving rules idea?
    Love it, I also save money for profit and pay (I use the Profit First system) so it would be so handy to not have to do this manually each time I get paid. (And to be able to change the percentages each quarter.)

  • What do you think is more useful for you - auto-saving to an external account, or manually moving money into a Coconut vault?

Auto-saving. But also happy to have it autosaved in Coconut and not get any interest. To be honest, interest is so shite that it’s almost pointless, the amount I’d earn in a year would be eclipsed by the convenience of not having to manually calculate and move money around every time I get paid.

Can’t wait, and also really happy to help beta test too :smiley:

I do profit first too. It’s been game changing for me, but how awesome would it be if Coconut could do all of the functions we need to make it work easily?!

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Agree Sandy, being able to choose the amount yourself, and to be able to change it as things change throughout the year, would be vital for me.

I think having multiple vaults and multiple rules would be the best. Being able to transfer a percentage of income to volts or to other bank accounts would be amazing. Aslo being able to pay from the pots would be good too.

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Sometimes some of the money that comes in on an invoice payment is destined to be paid straight out of my account on to someone else,or is a refund of an expense already incurred. It would be good to be able to indicate this on the invoice record or incoming payment so that the amount automatically sent to the tax saving vault reflects this reduction, since (especially for large expenses/onwards payments) this money is already accounted for in coconut as an allowable expense, and therefore doesn’t need to be saved.

I’m not sure what I have written here is very clear, but I’m basically trying to say it would be good if there was either a delay in automatic pot allocation upon recieving income to allow manual instructions, or a way of marking the invoices in advance, so that the app knows what to do when that money is received.

1 Like

Thanks @Jake_Rowe, makes sense to me - interesting point about when you need to pay out a portion of the money you receive. If we have auto-save rules then there’s a chance they end up oversaving - we’ll make it so you can withdraw any funds that get oversaved accidentally if this happens.

Interesting idea about marking on invoices whether auto-save should apply or apply at a different rate.

Another way we could do it is to ask you to confirm before moving the money over each time, or give you the option for us to ask you to confirm before moving the money. Although that feels a little less automated.

Thanks for this insight!

@Amy @jacksbyrne interesting to see you using the profit first approach, we could even have a rule for creating a ‘profit first’ vault where you put eg 5% into it, separate from a tax vault. Would be interested to hear more from you about how that might work.

1 Like

Yes please!

Profit First recommends 5 separate accounts/vaults:

Income

Profit

Pay

Tax

Operating Expenses (OPEX)

But I currently use my coconut account for both income and OPEX, and transfer percentages as soon as I get paid… I only get paid 3/4 times a month so that seemed easier for me. (Plus I couldn’t be bothered to change my invoices or direct debits so just kept them together)

You set your percentages each quarter, for example…

Profit 10%

Pay 40%

Tax 30%

OPEX 20%

And then when you get paid (as I do) or every two week (as recommended) you transfer money out of your income account accordingly.

The idea is that you can always see exactly how ‘healthy’ your business finances are at any point. So being able to have all of those ‘pots’ or ‘vaults’ in one account would make life so helpful.

Does that help? I’d thoroughly recommend reading the book. There are also a number of certified Profit First accountants, could be worth talking to some of them. Also a ton of resources here: https://mikemichalowicz.com/free-resources/ and this on how to find a bank that supports PF… https://profitfirstprofessionals.com/resources/how-to-find-banks-that-support-profit-firstp

Happy to chat through more if it would be helpful.

3 Likes

@Amy this is really cool thanks. @J.B take a look at this.

An option to confirm before moving money would be good I think. I personally don’t have a problem with it being slightly less than fully automated, now that I think about how I would use it.

1 Like

I use the Profit First approach too and would be relieved to set this up in Coconut instead of in a seperate account, which I do at present.

Couple of questions for everyone

  1. If you’re using the profit first method, do you have different accounts that you move your tax savings, profit and maybe even operating expenses to? Or do you move the total of all of these into one account?

  2. Following the chat with @Jake_Rowe over the last couple of days, we were looking at options yesterday for whether we automatically set aside money (with an easy way to reverse or amend it) or whether we give you prompt to set the money aside that you then confirm. It would apply to every transaction we identify as ‘Income’. It would be great to hear some people’s views on this.

Would you want it to be automated, or would you like a prompt to confirm the savings?

I would prefer a prompt before moving the money, that way, I have more control over any situation where I don’t want part of the income set aside. It also gives you a quick summary of what money has come in since you last checked, before the money is moved.