We’ve all been there… As business owners, we generally pay our taxes AFTER we’ve made the money which in most cases is up to a year after the event! Who remembers how much they’ve made a WHOLE YEAR LATER? I mean, I can’t even remember what I had for breakfast let alone how much tax I needed to save for a year ago… right?
Well, saving and planning for your tax bill doesn’t need to be that painful. Here are a few hints and tips to get ahead.
Firstly – why is it important to save for your tax bill?
Saving for your tax bill is important for several reasons, such as:
• It helps you manage your cash flow and budget more effectively, as you know how much money you need to set aside each month or quarter for your tax bill
• It reduces the risk of overspending or underestimating your tax liability, as you have a clear idea of how much tax you owe and when you need to pay it
• It avoids late payment penalties and interest charges from HMRC, which can be costly and affect your credit rating and reputation
• It gives you peace of mind and confidence, as you are prepared and in control of your tax affairs
How to save for your tax better
Keep better records – if you know how much profit you make, then you will have a much better idea of how much tax you owe. So get that shoebox full of receipts out and digitise it – use software such as Quickbooks or Xero (can cost from as little as around £5/ month – money well spent methinks!)
Keep receipts, bank statements, mileage logs, invoices etc. The better records you keep, the lower your tax bill will end up being and the less you will need to set aside for it
Estimate your tax bill in advance and save accordingly. You can use LeeP accountant’s online calculator or estimator to work out how much tax you need to pay, based on your income and expenses.
Open a separate bank account or savings account for your tax bill and transfer a percentage (30% of every invoice you get paid should do it) of your income to it every month or quarter. This will help you separate your tax money from your personal or business money and avoid spending it on other things. You can also earn some interest on your savings, which can offset some of your tax bill.
Some banks such as Starling or Monzo can do this automatically using something called “spaces” or “tax pots” meaning it’s all done behind the scenes for you as soon as the money lands in your bank account. This reduces the risk of you spending it!
Pay your tax bill in instalments or by direct debit, if possible. This will help you spread the cost of your tax bill over a period of time and avoid missing the deadline. You can arrange to pay your tax bill in instalments or by direct debit by contacting HMRC on 0300 200 3835.
If you wanted to, you could also pay HMRC early so that it’s not sitting in your bank account and at risk of being spent! HMRC will even pay you a small amount of interest if you pay early.
We hope this blog post has helped you understand how you should plan to save for your tax bill better and what you need to consider before doing so. If you need more help or advice, you can contact HMRC or LeeP Accountants on 01733 699033.