Open a separate business savings account and move the VAT out of each customer payment as it arrives: at the standard 20% rate, that's one sixth of every VAT-inclusive payment. Do it on a fixed day each week or as each payment lands, top up at the end of each VAT period for invoices that are still unpaid if you're on standard accounting, and you'll have the money ready when the return is due.
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The short version
- At the standard 20% rate, the VAT is one sixth of each VAT-inclusive payment.
- Keep it in a separate account in your business's name and move it on a fixed routine.
- On standard accounting, top up at period end for VAT on invoices still unpaid.
- On the Flat Rate Scheme, set aside your flat rate percentage instead.
- Gross payouts and automatic matching make the VAT on each payout easier to see.
How much to set aside from each payment
When a customer pays a standard-rated invoice, 20% has been added to your price, so the VAT is one sixth of what they paid, about 16.7%. A customer who pays £1,200 has paid £1,000 for your work and £200 of VAT. For sales at the reduced 5% rate, the VAT is one twenty-first of the payment. Zero-rated and exempt sales carry no VAT to set aside.
The VAT you owe HMRC is your output VAT minus the VAT you can reclaim on your purchases. Setting aside the full one sixth ignores the reclaim, so you'll usually end up with a little more than you need. Most people prefer that to the opposite, and the extra can go back into your main account once the return's paid.
On the Flat Rate Scheme, you pay HMRC a fixed percentage of your VAT-inclusive turnover, set by your type of business, and you generally can't reclaim VAT on purchases. Set aside that percentage of each payment, not one sixth. Limited cost businesses pay 16.5%, which is very close to one sixth anyway.
Where to keep it and how often to move it
Keep the VAT in a separate account in your business's name, ideally an instant-access savings account, so it isn't sitting in the balance you look at when you're deciding what you can afford. Name it plainly, such as "VAT", so nobody mistakes it for spare cash.
How often you move it matters less than doing it the same way every time. Some businesses move the VAT as each payment lands. Others do it once a week, adding up the week's receipts and moving one sixth. A weekly standing order for a fixed amount is easy to set up, but it drifts as your sales move, so check it against the real figure at least once a month. Some business bank accounts let you set a rule that moves a percentage of each incoming payment automatically, which takes the job off your list.
Either way, the transfer is something you set up with your bank. It helps if each payout matches the invoices behind it. Adfin pays out gross every weekday and invoices its fees to you separately, so one sixth of a payout for standard-rated invoices is the VAT on them. When a provider takes its fee out before paying you, the payout is smaller than the sales it covers, and working out the VAT from the payout understates it.
Match what you've saved to what you owe
How closely your savings track your bill depends on how you account for VAT.
On the cash accounting scheme, you owe VAT on what your customers have actually paid in the period, so setting aside one sixth of every receipt tracks your bill closely.
On standard accounting, you owe VAT on the invoices you've issued in the period, whether or not they've been paid. Setting money aside from receipts alone will leave you short when customers pay late, because the VAT on unpaid invoices is due anyway. At the end of each VAT period, add up the VAT on invoices issued but still unpaid and top up the account by that amount. When those invoices are paid in the next period, you'll have set that VAT aside already, so leave those receipts out of the next round of transfers.
Your return and payment are due one calendar month and seven days after the period ends, so a quarterly business has just over five weeks to file and pay after each quarter closes. If you check the balance against your accounting software's VAT report a week or two before the deadline, there's time to top up from your main account if it's short.
Make the receipts easy to find at return time
Your VAT return comes from your invoices and bills, not your bank balance, so the work at return time is mostly making sure every payment is matched to the invoice it paid.
Payments that arrive with a vague reference, or one payment covering several invoices, take the most time to sort out. Giving each customer unique bank details helps, because a transfer to those details can only have come from that customer. With Adfin, each customer gets their own bank details in your business's name, so bank transfers match themselves, and payments are marked paid in Xero or QuickBooks automatically. If you're on cash accounting, your VAT report then reflects what's been paid without anyone matching receipts by hand.
The fewer invoices left unpaid at the end of a period, the smaller the top-up on standard accounting, so reminders that start on the due date help here too. Adfin's collection agents can send them by email, SMS or WhatsApp within rules you approve.
Related guides
- Cash flow for UK businesses: a complete guide
- How to reconcile VAT when you get net payouts
- Does Adfin take its fee out of what it collects, or bill it separately?
- Payment reconciliation: a complete guide
- How to forecast cash flow when clients pay late
Common questions
How much of each payment should I set aside for VAT? At the standard 20% rate, one sixth of each VAT-inclusive payment, about 16.7%. At the 5% reduced rate, one twenty-first.
Should I set aside VAT from payments or from invoices? On cash accounting, from payments. On standard accounting, VAT is due on invoices whether paid or not, so set aside from payments and top up for unpaid invoices at the end of each period.
How much should I set aside on the Flat Rate Scheme? Your flat rate percentage of each VAT-inclusive payment, since that's what you pay HMRC.
Does Adfin move VAT into a separate account? No. You set up the transfer with your bank. Adfin pays out the gross amount your customers paid, with fees invoiced separately.
What should I do with any VAT left over after the return? Move it back to your main account once the return is paid. The surplus usually comes from VAT you've reclaimed on purchases.
When do I need the VAT money ready? By one calendar month and seven days after the end of each VAT period, when the return and payment are due.
Sources
- GOV.UK - VAT Flat Rate Scheme: how much you pay (accurate as of November 2026) https://www.gov.uk/vat-flat-rate-scheme/how-much-you-pay
- GOV.UK - VAT Cash Accounting Scheme (accurate as of November 2026) https://www.gov.uk/vat-cash-accounting-scheme
- GOV.UK - Send a VAT Return (accurate as of November 2026) https://www.gov.uk/submit-vat-return
- Adfin - Pricing (accurate as of November 2026) https://www.adfin.com/pricing
