When money lands in your business account, it’s easy to think of all of it as yours. Some of it isn’t. Part of every payment belongs to the ATO, and the businesses that get caught out usually aren’t doing anything wrong. They just didn’t know how much to hold back.
So how much should you put aside? The honest answer is that it depends, and the number that’s right for one business can be way off for another. Here’s what actually shapes it.
Why there’s no one-size-fits-all percentage
You’ll see rules of thumb online, usually somewhere around 25 to 30 percent of what you earn. They’re a reasonable starting point, but that’s all they are.
How much you need depends on how much profit you make (not your turnover), what you can claim, whether you have other income like a salary or rental property, and how your business is structured. Australia’s tax rates go up in steps as your income grows, so someone earning $50,000 and someone earning $150,000 need to put aside very different amounts. If you want to see how the steps work, we’ve broken down the 2026-27 tax brackets and what a tax bracket actually is.
There’s also the Medicare levy on top, which a lot of people forget about until their assessment arrives.
GST isn’t your money either
If you’re registered for GST, a portion of every sale is GST you’ve collected on behalf of the ATO. It needs to go back when you lodge your BAS, so it shouldn’t be counted as income you can spend. Keeping it separate from your tax savings makes life a lot easier. Our post on BAS and GST covers how that side of things works.
The second-year surprise
This is the one that catches most new businesses.
In your first year, nobody takes tax out of your income as you go. You lodge your first return and get a tax bill for that year. Then, if your business and investment income was $4,000 or more and your tax payable was $1,000 or more, the ATO automatically enters you into PAYG instalments.
PAYG instalments are just tax paid in advance. Instead of one big bill at the end of the year, you pay quarterly towards next year’s tax. That’s a good thing in the long run, but it means that in your second year you’re often paying last year’s bill and this year’s instalments at the same time. If you haven’t been setting money aside, that’s a big hit to your cashflow.
It doesn’t have to go that way. You can join PAYG instalments voluntarily in your first year, or plan your savings so the second year isn’t a shock. Which option suits you depends on your income and how steady it is, and this is the point where a quick conversation can save you a lot of stress.
Just started out and not sure what your first tax bill will look like? We can help you work out a realistic number before it arrives.
Can you change your instalments?
Yes. If your income drops or changes significantly, you can vary your PAYG instalments. Get it wrong, though, and the ATO can charge interest on the shortfall, and that interest is no longer tax deductible. Varying is a decision worth making with your accountant, not on a hunch.
What actually makes this easier
The businesses that never dread tax time tend to do a few simple things. They keep a separate account just for tax and GST, move money into it every time they get paid, and keep their books up to date so they always know where they stand.
That last one matters more than people think. If your Xero isn’t reconciled every month, you’re guessing at your profit, and that means you’re guessing at your tax. Clean numbers mean we can give you a figure you can actually rely on, and help you plan ahead rather than react in June.
If you’re still working out whether you’re running a business at all, start with Do I Need an ABN?
Let’s work out your number together
A percentage from the internet is better than nothing, but it’s not a plan. We’ll look at your income, your structure and what’s coming up, and give you a set-aside figure that fits your business. That way tax time is just another date on the calendar.
Want to know exactly how much you should be putting aside? Let’s have a chat.
This article is general information only and doesn’t take your personal circumstances into account. Speak with a registered tax agent before making decisions about your tax. We’re happy to have a free, no-obligation discovery call.