Cashflow for a 2-6 person trade firm: stage payments, retentions, and the £20k tax wall

A mate of mine runs a four-man plumbing and heating firm out of Warrington. Best year he'd ever had, turnover just over £310,000, three vans on the road, work booked eleven weeks out. In the last week of January he rang me because he couldn't pay his lads on the Friday.

Nothing had gone wrong. He hadn't lost a job or been stitched up by a customer. He'd paid a £20,800 tax bill on the 31st, had £11,400 sitting in retentions he wouldn't see for months, and £26,000 of invoices out on 30-day terms with a main contractor who paid on day 45 as a matter of policy.

Profitable on paper. Skint in the bank. That's the gap this guide is about.

Why growth is the thing that breaks you

Every job you take on has a period where your money is in it and the customer's money isn't. You've bought the boiler, paid two lads for a week, put diesel in the van, and you've not invoiced yet. That's working capital, and the bigger the job, the more of it sits out there.

Take on twice the work and you need roughly twice the working capital. The profit arrives later. The costs arrive now. This is why firms fall over in a good year rather than a bad one.

There are only four levers on it, and they're all boring:

• Get paid sooner (stage payments, shorter terms, faster invoicing)
• Pay out later (supplier accounts with 30-day terms instead of card on the trade counter)
• Hold less stock and fewer part-finished jobs
• Keep a buffer big enough that a single late payer doesn't reach the wages run

Nothing clever there. The firms that survive just do all four consistently.

Stage payments, done properly

Stage payments are the single biggest lever on a domestic job. The mistake is tying them to dates. "£4,000 on the 1st of each month" invites an argument the moment the job runs a week behind, and jobs always run a week behind.

Tie them to a stage the customer can stand in the room and see. Materials delivered. First fix done. Boarded and plastered. Tested and signed off. Nobody argues with a thing they can look at.

Worked example: an £18,400 bathroom and en-suite

Adam Wójcik trading as Wójcik Plumbing quotes a two-bathroom job in a 1930s semi. Total £18,400 including VAT. Materials come to £6,800, mostly a suite, tiles, a shower pump and a new manifold, all needing paying on order.

The payment schedule written into the quote:

• 25% on acceptance, £4,600. Covers the material order with £2,200 spare against the first week's labour. Paid before anything is bought.
• 30% on first fix complete, £5,520. Pipework in, walls out, ready for boarding. Roughly day 5.
• 30% on second fix and tiling complete, £5,520. Suite in, tiles on, roughly day 12.
• 15% on sign-off, £2,760. Snags done, silicone in, customer's signed the job sheet. Day 15.

Now compare the two worlds. On a single invoice at the end with 14-day terms, Wójcik Plumbing is £6,800 down on day one and doesn't see a penny until roughly day 29. That's a month of funding somebody else's bathroom.

On the staged schedule, the bank balance never goes below about £1,900 negative against that job, and the last stage lands eleven days sooner. Same job, same profit, completely different feel on payday.

What about the deposit argument

Customers push back on deposits, and some of that is fair. The defensible position is that the deposit covers materials you're buying on their behalf and nothing else. Show the material figure. If the deposit is quietly funding your labour or last month's van finance, it looks like what it is, and Citizens Advice guidance on paying up front is quoted at trades quite regularly these days. Keep it to the materials and you're on solid ground.

More detail on that in the guide to how much deposit a builder can ask for.

Retentions: the money you've already earned and can't touch

If you do any subcontract work for a main contractor, you'll meet retention. It's a percentage held back from every payment as security against defects. Usually 3% to 5%. Half released at practical completion, half at the end of the defects liability period, which is normally 12 months.

Say Wójcik Plumbing takes a £24,000 mechanical package on a small commercial fit-out at 5% retention:

• Held across the job: £1,200
• Released at practical completion: £600
• Released 12 months later, assuming somebody remembers to ask: £600

That last £600 is the problem. It's not the amount, it's the fact that it's invisible. Run four of those in a year and you've got £2,400 of your own money scattered across four contractors' bank accounts, none of whom will send it to you unprompted.

Three rules that make retentions survivable:

1. Price it in. If 5% is going to sit out for a year, that job needs to carry a slightly better margin than a domestic job of the same size. You're providing free credit, so charge for it.
2. Diary the release dates. The day you agree the contract, put both release dates in the calendar with the contract reference and the amount. Not a mental note. A dated reminder.
3. Invoice for it. A retention release doesn't turn up by itself. Send an invoice on the release date, quoting the contract and the practical completion date. If it's a business customer and they sit on it, the Late Payment Act route applies to retention exactly like any other overdue commercial debt.

Worth knowing: retention practice has been under review in UK construction for years and the reporting rules on payment performance have tightened, but for a firm your size the practical defence is still the diary and the invoice, not the policy debate.

The £20k tax wall

This is the one that catches out good firms in their second decent year, and it's entirely down to how payments on account work.

If your self-assessment bill comes to more than £1,000 and less than 80% of your tax was taken at source, HMRC asks you to pay towards next year in advance. Two instalments, 31 January and 31 July, each 50% of last year's bill. The first one lands on the same day as the balancing payment for the year just finished.

Worked example: a sole trader on £60,000 profit

Wójcik Plumbing, sole trader, taxable profit of £60,000 for 2025/26. Rough figures using current thresholds:

• Personal allowance: £12,570, so £47,430 is taxable
• Basic rate, 20% on £37,700: £7,540
• Higher rate, 40% on £9,730: £3,892
• Class 4 NIC, 6% on £37,700: £2,262
• Class 4 NIC, 2% on £9,730: £195
• Total for the year: £13,889

Now the January statement. Assume the previous year was similar, so £6,944 has already gone in payments on account.

• Balancing payment for 2025/26: £13,889 minus £6,944 already paid = £6,945
• First payment on account for 2026/27, 50% of £13,889 = £6,944

In the first year you're in the system, though, there's no credit for payments already made. The full £13,889 falls due plus the £6,944 first instalment. £20,833 on 31 January, then another £6,944 on 31 July.

That's the wall. It isn't a penalty and it isn't a mistake on HMRC's part. It's just the year the system asks for eighteen months of tax in one go, and it always seems to land in the quietest trading month of the year.

The pot system

The fix is unglamorous and it works. Three accounts at the same bank, transfers set up the day money lands:

• Trading account. Everything comes in here. Nothing sits here.
• Tax pot. On the day an invoice is paid, move 25% to 30% across. If you're VAT registered, the VAT element goes here too, on the day it lands, because it was never your money.
• Buffer. 5% of every payment until it holds eight weeks of fixed outgoings. For a four-person firm that's usually £18,000 to £30,000 once you've counted wages, van finance, insurance, and your own drawings.

Do the transfer the same day the payment clears, not at month end. Money that sits in the trading account for three weeks gets spent on a compressor.

CIS makes it worse before it makes it better

If you're using subbies, the 20% you deduct from a registered subcontractor's labour is payable to HMRC by the 22nd of the following month. It passes through your account and it isn't yours at any point. If you're the one being deducted from, 20% of your labour is withheld at source and only comes back through your return, which is its own cashflow lag. The CIS guide covers the mechanics.

What NOT to do

1. Don't fund the tax bill out of the current job's deposit. This is the loop that ends firms. You take a deposit, spend it on last quarter's VAT, then need the next deposit to buy the materials for the job you've already been paid for. It works right up until one customer cancels.
2. Don't quote a big job without a stage schedule. Anything over about £5,000 with materials in it should be staged. A single invoice at the end means you've lent the customer five grand at 0% and they didn't even ask.
3. Don't forget the second half of the retention. Twelve months is long enough that the contract has left your head entirely. If it isn't in the diary with the amount and the reference, treat it as written off, because in practice it usually is.
4. Don't use the overdraft as the buffer. An overdraft is repayable on demand and gets pulled at the exact moment your figures wobble, which is the moment you need it. A buffer is money you own.
5. Don't chase turnover for its own sake. A £310,000 year at 8% net margin with 45-day payers is a harder business to run than a £190,000 year at 18% with staged domestic work. Growth that needs more working capital than it generates is just an expensive hobby.

The 20-minute monthly check

Once a month, on the same day, write down four numbers:

• Cash in the bank, trading account only, ignoring the tax pot because that money is spoken for
• Money owed to you, split into current and overdue
• Retentions outstanding, with the release dates next to them
• Fixed outgoings for the next eight weeks, wages first

If number one plus the current half of number two doesn't comfortably clear number four, you've got a problem arriving in about six weeks and you've now got six weeks to fix it. That's the whole point of doing it. Cashflow problems are always visible before they're painful, but only if somebody's looking.

Invoicing the same day the stage completes is the other half of it. Not Sunday night when you sit down to do the paperwork. The day it happens, from the van, before the goodwill cools. Every day you delay the invoice is a day added to the end of the payment, and that day comes out of your bank, not theirs.