Income Allocation – how much of your income should you allocate where?

The most important element when it comes to financial planning for your business is your budget.

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It will give you critical insights into how your business is doing – income, cashflow and expenses.

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But do you know what percentage of your income you should be allocating to the different categories required to keep your business afloat?

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One business owner came to us recently with a problem: a perfect storm of misinformation from their current accountant and a miscalculation of tax allocation by their bookkeeper meant they’d been landed with a shockingly high tax bill.

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Don’t make the same mistake – check out our guide below so you can avoid any unpleasant surprises!

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Why do I need to know about budget percentage allocation?

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As well as making sure you don’t end up with any nasty shocks come tax season, understanding how you assign your budget percentages will help you see where you can cut costs (if needed), or increase your spend in certain areas.

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Do all businesses follow these percentages?

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Obviously business budgets (and their categories) aren’t identical across the board, however having an idea of a structure to follow will not only help you plan for the longterm rather than going from month to month.

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Fixed costs

Aside from salaries (which we’ll talk about later) you need to think about how much you’re spending on (for example) rent. That swanky office might give you great optics, but have you thought about how much of your income it’s eating up?

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To find out what percentage of your income you’re spending on rent, divide your yearly leasing costs by your gross annual income: for example, if your annual rent is £100,000 and your income is £750,000, that means that rent takes up roughly 13% of your income. That’s definitely at the high end of the scale. In our experience keeping that percentage to under 10% would be advisable.

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Operating costs

Obviously your business is going to have outgoings, not only for the basic necessities (laptop, phones, even a printer, paper and ink if you haven’t gone paperless) but also for more expensive needs – anything that’s niche to your industry. As with rent costs, it’s essential that your spending is inline with your budget – ideally no more than 30% of your income.

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Variable costs

By which we mean purchase invoices, credit card payments and entertainment expenses. These will change from month to month (obviously) but if you look back on past months you’ll be able to determine some average costs and allocate your ideal percentage. It’s best to keep a firm eye on these costs to see if you’ve over- or underestimated your allocation.

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Salary

It’s difficult to quantify the ideal percentage to allocate to payroll, as obviously it will differ between industries and depending on the size of the company. However it’s generally advised that salary and payroll should account for between 15-30% of your annual income.

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Do bear in mind that (depending on your company size) if your salary allocation percentage is too high it could seriously hamstring your business – you run the risk of running out of money elsewhere. Conversely, if you’re not paying your team enough you run the risk of them seeking other employment. As with all your costs, it’s important to have a good strategy in place.

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Taxes

As with the business owner we mentioned in our introduction, it’s vital to make sure that you’re keeping enough funds in reserve to cover your tax bills, otherwise you risk not being able to make payments.

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Your accountant will be able to advise you of the approximate percentage you should be allocating from your income but take a look at the below guide to Corporation Tax for this year and next as an indication of what amounts you should be setting aside.

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If you’re struggling to know where you should be putting your money – get in touch today – we offer London bookkeeping services throughout the capital – we’re here to help!

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