No one wants to make unexpected payments to HMRC, so whether you are self-employed or running your business through a limited company, it is important to ensure that you have sufficient funds set aside to pay your tax bill.
The amount you need to save for your tax bill depends on your business setup and your individual circumstances. As a general rule of thumb, you should set aside between 20% and 30% of your profits to pay your tax bill.
You should consult with an accountant to determine the correct amount required to pay tax. Being aware of how much you owe HMRC frees up your time to focus on the growth of your business.
At Spotlight Accounting, we always recommend having a separate bank account that acts as your tax pot and setting money aside each month to save for the current year’s tax. If you haven’t saved for your tax bill throughout the year, then filing your tax returns early would be beneficial as it would provide you with adequate time to save for payment.
How much to save, however, depends on two factors:
- Your individual circumstances, i.e. if you are self-employed or a limited company, and how much second income you generate
- The net profit of your business
For example, an employed higher rate taxpayer with self-employment income as a side hustle could end up paying tax and national insurance at 49%, whereas an individual whose only income is £9k of self-employment profits will pay no tax or national insurance.
How can you save for your taxes?
The first step in saving for your tax is understanding how to calculate the net profit of your business.
To do this, you need to keep accurate and up-to-date records of income and allowable costs for each tax year. Using an accounting software package, such as Xero, can effortlessly help you keep track of this.
Your accountant should assist in providing you with a percentage that you need to set aside, as different factors such as other income, a company car, pension contributions, tax relief and charitable donations tax relief can all impact how much tax you will have to pay.
For example, an additional rate taxpayer could save an average of 37%, whereas a basic rate taxpayer may only need to set aside 15%.
Why should you budget for your tax bill?
Under self-assessment, your personal tax bill is due, in most cases, in two payments. The first is made on 31st January following the end of the tax year, with the second payment due on 31st July (if you are making payments on account).
Without sufficient budgeting for your tax, you could end up with a high tax bill that you can not afford to pay.
If you have a separate savings account for your tax bill that you are paying monthly, this should ensure that you have cash in the bank when it’s time to pay your tax.
What type of taxes need to be accounted for?
There are several taxes that, as a business owner, you need to account for.
Income tax and national insurance contributions
All profits from businesses, including those related to property, are subject to income tax, whereas national insurance contributions only apply to trading profits, not property income.
The current rates of income tax are:
- 0% up to the personal allowance of £12,570
- Basic rate tax of 20% for profits between £12,571 and £50,270
- Higher rate tax of 40% for profits between £50,271 and £150,000
- Additional rate tax of5% for profits over £150,000
NI for self-employed people is as follows:
- Class 2 – £3.45 where profits are over £12,570
- Class 4 – 9% on profits between £12,570 and £50,270, then 2% on profits over £50,270
Dividend rates differ from the rates stated above.
If your business turnover exceeds the VAT registration threshold (currently £85,000), you will need to register for VAT and submit regular VAT returns.
VAT will be chargeable on your sales, but you can recover VAT on your business costs.
Capital Gains Tax
If you dispose of an asset like a second property or investment shares, you must pay taxes unless it is a second home, in which case the tax should be reported in your self-assessment tax return.
Gains over the personal allowance are payable at 10% (or 18% on the residential property) for a basic rate taxpayer, whereas higher or additional rate taxpayers are subject to a 20% tax (or 28% on the residential property).
Corporation tax is payable on Limited Company profits.
The main rate of corporation tax is 25% for profits over £250,000. If a business has profits below £50,000, the small profits rate is 19%. Between £250,000 and £50,000, marginal relief applies.
Get in touch with Spotlight Accounting for a tax review
At Spotlight Accounting, we will work with you to make sure that you are setting aside enough money to pay your taxes. We will also ensure that you are taking advantage of all tax reliefs available and claiming for all legitimate business expenses so that your business is as tax efficient as possible.
Our team combined has over 110 years of experience dealing with small businesses, so we can help you understand and navigate your tax bills seamlessly.
Whether you are a landlord, limited company or small business, it is important to understand your tax obligations, when payment is due and how much you need to be setting aside.
The fundamentals to doing this are to keep accurate accounting records and to set aside a percentage of profits into a separate savings account to prepare for your bill.
To find out more, contact Spotlight Accounting today!