How to Budget for Yearly Bills: A Simple Sinking Fund (UK)

Monthly bills are easy to plan, because they come out every month. Yearly bills are the ones that catch people out: the TV licence, car tax, the MOT, an insurance renewal. They arrive once, all at once, often in a month that is already tight.

A sinking fund fixes that. You save a twelfth of every yearly bill each month, so the money is waiting when the bill is due.

Step 1: List your yearly bills

Go through last year’s bank statements and emails and write down every cost that comes once a year. Common ones in the UK:

Bill	What it costs	Source
TV licence	£180	GOV.UK (only needed for live TV or BBC iPlayer)
Car tax, standard rate	£200 for a single 12-month payment	GOV.UK, cars registered on or after 1 April 2017, from the second payment
MOT	up to £54.85 for a car	GOV.UK maximum fee; the first is due by the car’s third anniversary
Car insurance	your renewal quote	Your insurer
Home or contents insurance	your renewal quote	Your insurer
Yearly subscriptions	your plan price	The service’s account page
Boiler service	your quote	Your engineer

Note the month each one is due as well as the amount.

Step 2: Add them up and divide by 12

A worked example, with made-up insurance prices:

• TV licence: £180
• Car tax: £200
• MOT: £54.85
• Car insurance: £600
• Contents insurance: £120

Total: £1,154.85 a year. Divided by 12, that is about £96 a month. Round it up to £100 to leave room for price rises at renewal.

The monthly figure for each bill

Breaking the total into each bill’s monthly share makes it easier to see what you are saving for:

Bill	Yearly	Monthly share
TV licence	£180	£15.00
Car tax	£200	£16.67
MOT	£54.85	£4.57
Car insurance (example)	£600	£50.00
Contents insurance (example)	£120	£10.00

Step 3: Move the money every payday

Set up a standing order for that amount into a separate pot or savings account on the day after you are paid. Doing it automatically means you never have to remember, and keeping it separate means it does not get spent on everyday things.

Our guide to a separate bank account for bills shows how to set this up alongside your monthly bills.

Step 4: Pay each bill from the pot

When a yearly bill is due, pay it from the pot. Because the money is already saved, you can usually choose the yearly payment option, which is often the cheaper one:

• GOV.UK says car tax paid monthly or every 6 months by Direct Debit has a 5% surcharge, and paying yearly has none.
• The FCA says paying insurance monthly with interest is a credit agreement, typically equivalent to an extra 8-12% on top of the premium.

Our guide to paying yearly or monthly compares the main bills.

Step 5: Check the pot against the calendar

Yearly bills do not arrive evenly. If your car insurance and car tax both fall in March, the pot might not have enough by then in the first year. Two ways to handle it:

1. Start with a top-up. Move a lump sum in at the start, if you can, to cover the bills due in the first few months.
2. Save faster for the early ones. For a bill due in four months, save a quarter of it each month until then, then drop back to the normal amount.

After the first year, the pot keeps itself topped up.

Other costs that work the same way

The same pot method works for anything that arrives once a year at a known time, even if it is not a bill: a car service, glasses, a festival ticket or Christmas. Keep these in a separate pot from the bills so the bill money is always there for the bills.

Keep yearly bills on your bill list

The danger with yearly bills is forgetting them entirely. Put each one on your bill list with its renewal date, even though it only comes once a year. A bill tracker like Billo handles bills that repeat every year as well as every month, and reminds you 3 days before each one is due, so a renewal never arrives as a surprise.

Our guide to never missing a bill covers reminders for every kind of bill.