Your tax bill is probably one of the most unexciting things to talk about. But it’s something that can often keep business owners up at night. There’s a real fear and lack of understanding around taxes and if that’s something that worries you, know you’re not alone! After all, you don't want to suddenly be surprised on January 25th by a £5,000 tax bill and have no idea where you will get the money to pay for it.
So it does pay to understand your tax and educate yourself on how tax works because that’s the best way not to be surprised by your tax bill when it arrives!
There are several different types of tax, depending on the type of business you have. So if you are a sole trader, all of your income is taxable as income tax and National Insurance. Remind yourself that you should be putting aside 30% of your income less costs if you can. Put that money into another account at the end of each month.
I think it's tough for many to do initially because when you’re employed, that money is all taken before you even see it, so you don't notice it so much. But when you're self-employed, it's really important to build in this habit of saving 30%, because it’s quite a lot to find otherwise. And, as your tax return isn’t due until January 31st for the year ended the previous April, it’s often months and months after you got the initial money in, and that tax bill then comes as a big surprise. And you don't want that sort of surprise.
So put aside 30% to cover your income tax and National Insurance. Hopefully, you'll then have a bit left over.
If you're a limited company, you'll be paying Corporation Tax, and that's currently set at 19% and is charged on your company profits. If you’re a company Director, you also might have dividends from your company and a salary.
You should talk to your accountant about making sure that you’re making the most of your taxes without falling foul of the law. Because you need to make sure that you're doing all the right things and paying yourself in the most tax-efficient way.
VAT, or Value Added Tax, is something you need to pay if your income is over £85,000 a year. You have to be registered for VAT, and all of your income then has to be taxed at 20%.
You can be self-employed or a company to register for VAT. There are also various schemes that you can go into. But if you’re registered for VAT, you have to charge VAT on everything. The good news is you can also claim VAT on invoices that come into you with VAT on them. So for most service businesses, you'll end up paying VAT, not reclaiming it, because you hopefully have more sales than you have costs that have VAT on them.
Okay, so what steps can you take, so you’re not surprised when your tax bill arrives?
Places like Starling Bank make this easy. They have spaces that enable you to put money out of the way. Do this every month, and you’ll know there's enough money for your tax bill. I
You mustn't lose sight of how much you need to have aside. Because you can be earning £50k in a year, that means you're going to be paying £15k in tax. That's a lot, and you don't want to have to find that. So make sure that you've put aside what you need and do it monthly.
If you're VAT registered, you will need to have a system where you can make tax digital because you have to submit it online. You'll need to have an accounting system like Xero or QuickBooks for this. And talk to your accountant about that because it makes it much easier, and you just press a button to submit it. You can also see how much of it is on an ongoing basis. Again, you need to keep saving money aside each month to cover this.
Especially when it comes to VAT registration. There's going to be another episode on this coming up, but think about what will happen to your prices. Are you business to business, where you can just put VAT on because they’re VAT registered anyway? Are you going to have to absorb VAT within your current prices - or look to do a combination of the two? You need to think about your pricing; otherwise, your pricing goes down by 20%, and you're taking 20% Less; that's not ideal.
If you're going to earn a lot more or a lot less in a financial year, get your submission in early for your tax return. Why? Because you make a payment on account in July - they will adjust that to reflect it. This is especially relevant if your tax is going to be significantly less, I would try to get that in. You could submit the return but not have to pay it until January. So get it done in April or May, and then it's just done, and you'll know how much it's going to be and what the situation is. I think that's important.
They're often not expensive, so get someone to do your tax return. It takes all the pressure off, and they make sure you’re claiming everything you can.
To help you get more organised with your tax, I’ve created a freebie for you. It's called ‘Why all your small business income isn't yours to keep’, and you can find that at https://thepricingqueen.com/tax. I’d love to hear your thoughts on it and this topic generally, so do please leave a comment below.