Monzo Business tax pots: how they work for sole traders and limited companies

What Monzo Business Tax Pots are

A Tax Pot is a pot inside your Monzo Business account that fills itself. You choose a percentage, and every time money comes in, Monzo moves that share of it into the pot before you have a chance to spend it. Monzo’s own description is a percentage of every incoming payment, moved automatically, and its feature page puts it as “Automatically put a percentage aside for tax and other big bills every time you're paid”.

That is the whole idea, and it is a good one. The most common tax problem for a small business is not a calculation error. It is spending money that was always going to belong to HMRC, then having to find it in January or nine months after the year end. A pot that skims a share off the top of every payment turns tax from a lump you have to find into a balance that builds as you earn.

It is a popular feature. Alongside the news that Monzo Business had passed over one million customers, it was reported that nearly £7 billion had been set aside in Tax Pots across Monzo Business. That figure says nothing about whether the pots are right for you, but it does suggest a lot of businesses find the mechanism useful.

How Tax Pots work, step by step

The mechanics are simple, and worth knowing in detail before you rely on them.

1. Create the pot. In the app, add a Tax Pot and give it a name. Monzo does not decide what the pot is for; you do.
2. Set a percentage. Monzo lets you pick a custom percentage. It applies to each incoming payment.
3. Get paid. When money arrives, the chosen share moves into the pot automatically. You see the payment land and the pot top-up together.
4. Edit when things change. Swipe to the pot and tap edit to change the percentage. You can also move money in and out by hand, or turn the pot off.
5. Pay the bill. Either move the money out when the bill is due, or set the pot to pay a Direct Debit or standing order directly (more on that below).

Two practical points. First, the percentage applies to what Monzo treats as being paid. Monzo describes it as every time you’re paid, but check in the app which incoming money triggers it in your case, for example a supplier refund or money you move in from another account. If something that is not income lands and gets skimmed, you can move the excess back.

Second, Tax Pots appear on your statement in their own section. Monzo says movements to and from a Tax Pot show in your main statement with a separate section at the end. For an accountant reconciling the year, that is tidier than a stream of pot transfers mixed in with sales and costs.

Which plans include Tax Pots

Tax Pots are part of the paid plans. Monzo’s wording is plain: “you can only have a Tax Pot if you've got Business Pro or Team and you can only have up to three at once for each account”. Pro is £9 a month with the first month free, and Team is from £25 a month. The free Lite plan does not include them.

Pro and Team also bring Tax Pots, invoicing, accounting integrations, virtual cards, connected accounts and custom categories. If you are weighing up whether the fee is worth it, Tax Pots on their own may not justify it for a small sole trader, but Tax Pots plus invoicing plus an accounting feed often does. Our page on whether Monzo Business Pro is worth it works through the maths, and the Monzo Business plans compared page sets out everything each tier includes.

Plans can change, and Monzo says exact plan benefits are confirmed during sign-up in the app. The FAQ on Monzo’s Tax Pots page also says you can have “a maximum of 3 Tax Pots depending on which plan you select”, so check the number on your plan when you set them up.

Setting a Tax Pot percentage as a sole trader

Short answer: estimate your tax for the year, divide it by the money you expect to receive, and use that as the percentage, rounded up. Then check it each quarter.

A sole trader pays Income Tax and Class 4 National Insurance on profit, not on takings. That is the main thing to get right. If you receive £60,000 in a year and spend £15,000 on costs, the tax is worked out on the £45,000 profit, so a percentage based on profit would over-save if you applied it to every payment in. You want the pot percentage to be your expected tax divided by your expected receipts.

Our tax set-aside calculator does exactly that: you enter expected income and costs, it estimates the tax, and it gives you a percentage of each payment to put in your Tax Pot. Use it as a starting point, not a final answer, and round up rather than down. Being a little over at the end of the year is a pleasant surprise; being under is a bill you have to fund from elsewhere.

Payments on account

Most established sole traders also make payments on account: two advance payments towards next year’s bill, due on 31 January and 31 July, each usually half of the previous year’s tax. HMRC sets them out on its payments on account guidance. In your first year of trading this can mean the January bill is the whole of last year’s tax plus half of it again. A Tax Pot that has been running all year is the easiest way to be ready for that.

Should a sole trader use more than one pot?

Often one pot is enough: Income Tax and National Insurance are paid together through Self Assessment. A second pot makes sense if you are VAT registered, because VAT is a separate bill on a separate cycle and is worked out on sales rather than profit. Some sole traders use the third pot for a pension contribution or an annual expense such as insurance. There is more on account choice for sole traders in our business bank accounts for sole traders guide.

Sole traders and landlords within Making Tax Digital for Income Tax also get Monzo’s free MTD software, which sits naturally next to a Tax Pot. Our page on Monzo Business and Making Tax Digital covers what it does.

How a limited company uses three Tax Pots

Short answer: give each of the company’s main liabilities its own pot, because each one is calculated differently and due at a different time. A common set is VAT, Corporation Tax and payroll or dividend tax.

Monzo does not brand the pots as VAT or Corporation Tax. They are generic percentage pots and the company names them. That flexibility is the point: a company’s tax position is not one number.

The rates and dates above are from HMRC: Corporation Tax rates, when to pay Corporation Tax, VAT Return deadlines and paying employers’ PAYE. Your accountant will know which apply to you, especially if you use a VAT scheme such as the Flat Rate Scheme, where the VAT you pay is a different share of turnover.

The VAT pot

VAT is the easiest pot to set because it barely depends on your costs. If everything you sell is standard rated and your customers pay VAT-inclusive amounts, one sixth of every receipt is output VAT, so a percentage of about 16.7% captures it. The VAT you reclaim on purchases reduces the bill, so the pot will tend to end each quarter with something left over. Leave that surplus as a buffer or move it to the Corporation Tax pot.

The Corporation Tax pot

Corporation Tax is a percentage of profit, so the pot percentage has to translate profit into receipts. The rough formula is your Corporation Tax rate multiplied by your profit margin. A company with a 30% margin paying the 19% small profits rate owes about 5.7% of its net sales in Corporation Tax. If it is VAT registered and the pot skims VAT-inclusive receipts, divide by 1.2, which gives about 4.75%. Round it up to 5% and review once the year’s numbers firm up.

The long gap before Corporation Tax is due is where a pot earns its keep. Nine months and one day after the year end is a long time for money to sit in a current account looking spare.

The third pot

What goes in the third pot depends on how the directors pay themselves. If the company runs payroll, a PAYE pot covers employee Income Tax, National Insurance and employer contributions each month. If directors take mainly dividends, some companies keep a pot for the personal tax the directors will owe, so the money is there when it is paid out. Our guide to paying yourself from a limited company covers how that works. Dividend tax is a personal liability, so the pot is a planning tool; the company does not pay it.

A worked example

Take a VAT-registered limited company whose customers pay £12,000, including VAT, in a month. It sells standard-rated services, runs at about a 30% margin and expects profit under £50,000 for the year. It pays one director a salary through payroll.

These numbers are illustrative only. The point is the shape: VAT is the biggest pot by far even for a profitable company, because it is a share of sales rather than profit, and Corporation Tax is smaller than many directors expect month by month but due all at once. The tax set-aside calculator runs the same logic with your own figures.

Paying HMRC from a Tax Pot

Short answer: Direct Debits and standing orders can come straight out of a Tax Pot; for anything else, move the money to your main balance first.

Monzo says you can set up a Tax Pot to pay Direct Debits or standing orders directly from the money in it. When a payment is due, Monzo moves the money from the pot into the account balance and immediately out again. If your VAT or PAYE goes to HMRC by Direct Debit, pointing that Direct Debit at the matching pot means the bill is paid from the money you put aside for it, and your main balance is untouched.

HMRC accepts Direct Debit for several taxes; its PAYE payment page lists it as an option for employers. For a one-off payment, such as a Corporation Tax bill paid by bank transfer, move the amount out of the pot and pay it from the main balance as usual.

How we use Tax Pots

If you want the wider picture of what we use day to day, our Monzo Business review covers the rest of the account.

Limitations of Monzo Tax Pots

Tax Pots are useful, but they are a set-aside tool, not a tax tool. The limits worth knowing:

On interest specifically: Monzo’s Instant Access Savings Pot is a separate product, and Monzo’s savings page is the place it describes interest. If a large Corporation Tax balance will sit for most of a year, some companies periodically move part of the Tax Pot balance into a savings pot and move it back before the bill is due. That is a manual step and you need to be disciplined about it. Our page on Monzo Business savings covers the rates and how they vary by plan.

If you are on Lite, or banking elsewhere

On the free Lite plan you can still create ordinary pots and move money into them by hand or by scheduled payment. It is not automatic per payment, but a weekly transfer of a fixed amount gets you much of the benefit if your income is regular.

Other business accounts have their own ways of ring-fencing money, with different limits, plans and levels of automation. If set-aside tools are a deciding factor, our Monzo Business vs Starling comparison sets out the differences side by side.

If you decide Monzo Business suits you and you have never had a Monzo account of any kind, opening through our Monzo Business referral link gets you and us a reward once you download the app, apply, add money and make a first card payment within 30 days. Tax Pots need Pro or Team, but the reward does not depend on which plan you choose.