budgeting for your tax bill

Limited companies pay corporation tax on their profits, this tax is paid 9 months and 1 day after the year end (I tend to work on 9 months after the year end with clients as that is much easier to remember!).

So many businesses forget that they need to set aside money for this, they look at their bank account and think “YAY! Money in the account, I can buy this, I can buy that, I can pay myself and my staff more …. “ but if they don’t budget and set the cash aside then there is a potentially massive shock coming further down the line.

The easiest way to be able to budget for your tax bill is to keep your accounting records up to date and look at your profit each month and sit 19% aside (the rate of corporation tax dropped from 20% to 19% from the start of April 2017) but don’t just mentally sit this aside, put the cash in a different business bank account so that you don’t spend it!

If you don’t keep your records up to date to have management information then this is obviously harder to do as you are having to guess what you might need.  But there are still options:

  • If you are established then set aside a certain % from each invoice – this works well if you raise a few invoices each month that are a decent amount of money, it doesn’t work well if you raise hundreds of small invoices.  Look at past years to work out this % .. if you had sales of £50k and you tax bill was £5k then you need to set aside around 10% of income and that will be a rough and ready estimate.
  • If you a new business then do some research, what sort of profits are you expecting to make, if you think you will make 20% profit then each month see what your sales are, calculate 20% and then set aside 19% of this (in this example this is just under 4% of the sales number).  This is more rough and ready than the above method but it is a starting point and most definitely better than nothing.

There are a few things to remember .. what you class as profit and what HMRC class as profit are two different things! The key adjustments that are made are:

  • Entertainment expenditure – HMRC add this back and it isn’t an allowable expense for tax purposes (but it is allowed in the accounts)
  • Depreciation – this is an accounting entry to spread the cost of your assets over their expected life span.  HMRC deals with Capital Allowances and Annual Investment Allowances, your accountant will sort this for you.

If you want more information then contact us.

Rachael Savage