30 May 2017
How to save for your tax bill
I’m quite lucky when it comes to my annual accounts; I might have a marketing business but my degree is in accountancy! Granted, it’s now nearly 17 years old so my knowledge is more than a little dated, but my foundation knowledge of how useful and important figures are to my business remains invaluable.
Tax was one of the hated subjects when I was a student and now I’m a business mentor I still get my brains picked about it regularly.
Every year I see people scrabbling around at the end of January; scrabbling for time to file their Self Assessment at the last minute, scrabbling for money to pay the tax bill, scrabbling for their sanity after trying to do a year’s worth of accounts in a day and scrabbling for caffeine after pulling an all nighter the day before the deadline (31st January each year if you don’t know by now!).
My advice is simple:
- Your profit doesn’t belong to you (at least not all of it!)
- You pay tax on your profits, so around 20% of your profit belongs to HMRC
- So DON’T BLOODY SPEND ALL OF YOUR PROFIT!
- Finally, put time in your diary for your accounts and stick to it,
However, I know that’s a bit blunt and simplistic so I’ve invited Simon Oxley, Business Development Manager from Oxley Pratt Accountancy Services in County Durham to give you more detailed advice.
This is a post worth saving and sticking to your forehead.
Let’s hear from Simon:
Saving for your tax bill – Your Business New Year’s Resolution
As accountants, we know that the first few years of business can be tough, there’s no getting around it and bookkeeping, accounts and tax seem to terrify even the most tenacious of our clients. Most new clients ask us: “How do we save the right amount of money for tax?”
There are ways to make it easier and I’m going to give you a list of handy, practical tips.
Remember the crucial date: any tax you owe is due to be paid to HMRC on January 31st, the same date that online tax returns are due (remember that is the final, final, FINAL date, so you can submit your tax return anytime from 6th April to 31 January, and the sooner the better as I’ll explain later).
December and January are stressful anyway, and HMRC can hand you a double whammy if you have “payments on account” (advance payments towards your following year’s tax bill). If you don’t budget, it can be a huge blow to your cashflow. The main reason most small businesses fail isn’t a lack of sales or profit but a lack of readily available cash to pay big bills. How ironic would it be if you’d had a really successful year on paper and your tax bill crippled you and took your business down. We see this happen; businesses don’t save for their tax and then suddenly they give themselves days to settle their bill with HMRC and that cash can’t then be used to pay wages, suppliers, fuel etc and your business grinds to a halt.
You might think tax is unfair (we hear worse descriptions than that!) and you’re entitled to your opinion, but one thing tax isn’t is a surprise. It is a certainity, so not providing for it is a major business failing. If, as a sole trader, your profit is over a certain limit (currently £11,000 for 2016/2017) you WILL pay tax on anything over that limit. You WILL! The tax man won’t let you off just because you’re a lovely person.
So set yourself a business new year’s resolution – save tax over the course of a year, and save yourself a lot of hassle!
Clearly entrepreneurs and business owners have enough to worry about, without the stress of a last minute big tax bill, so here are our simple tips for saving towards your tax bill and staying solvent.
Pretend you’re employed
When you work, tax is deducted before you get it on payday. Give yourself a monthly payday, and become your own taxman.
Accept that not all of your incoming money is YOUR money
As the tax man does, set yourself a tax rate, and separate that from the rest. Look at your sales for the month, and set aside 20%. This is 20% of the total sales for the month – not just profit. This is so that you have enough to pay your tax and NI.
- Even though we advise you save 20% of your sales, you will only actually be taxed on 20% of any profits over 11,000.
- NI will also be deducted
- 20% saved of sales is, in most circumstances, an overestimation and will be more than enough to pay your tax bill.
Keep tax money separate
Save it in a separate bank account, or a saver account. Saving money in your business current account makes it very difficult to keep track of, and also much more tempting for you to spend! Put it somewhere separate from the rest of the business money.
Keep good records
Keep track of how much you have made in sales, how much you have spent in expenses, what is left in profit and how much you have put aside for your tax bill. Not only will have a much better idea of how your business is doing but you will also be able to adjust your tax saving rate in future years as you know more about your business performance.
Submit your self assessment early
(or ask your accountant to) – this way you will know how much your tax bill is well before the deadline. As a rule, try to have your self assessment submitted by the end of November. This will give you two months to pay your tax bill by the January 31st deadline. If you have saved 20% over the course of the year, you will not only have more than you need to pay HMRC, but you will also have a nice little bonus saved, just in time for Christmas.
Thanks to Simon for his great advice. Oxley Pratt are my accountants so I really have no excuse do I?!
Now where did I put all those fuel receipts….
I’ve worked with Simon to create a lovely freebie to give you 10 Top Bookkeeping Tips called: Keep Calm! It’s Only Bookkeeping!
If you’d like a copy just pop your details below and it will be emailed out to you as a pdf to download and keep.