Budgeting for your tax bill: Self Assessment
When you first enter the world of self employment that first tax bill can come as a bit of a shock, especially if you have been employed previously and used to paying PAYE. But, there is that double whammy too .. you pay not just that bill but 50% of next years estimated bill too!!
Yes! HMRC estimate your next tax bill to be the same as this years and you then make payments on account in January and July (tax due needs to be > £1k).
So year 1 and your tax bill is £2,000 .. you have to pay £2,000 by 31 Jan AND £1,000 towards next years bill.
Then in July you pay the other £1,000 – you’ve paid £2,000 of tax ready for the next bill.
You then do your year 2 self assessment and the bill is £2,100 so in the Jan you pay the additional £100 and £1,050 as year 3’s first payment on account … and so on.
After the first year it isn’t so bad – you are paying your tax as you go and there isn’t that double whammy hit but when you are just starting out it is a big cost.
So what should you do .. it’s boring, but budget and set aside cash for your tax bill as well as paying tax you will also have 9% NI to pay .. if you set aside a fixed percentage of each sale each month then you will have enough for your tax bill and hopefully some left over, most small self employed businesses opt for around 25 - 35% of sales so that they have plenty and a pot to use for other expenditure too.
If you keep accounting records and know what your profits are then you can work out the tax as you go and set the right amount aside and rather than waiting until you hit your personal allowance level of profit and then start setting money aside, divide your personal allowance down and use that as a guide each month instead.
Yes, it takes discipline but it’s better than being caught unaware! And complete your tax return sooner rather than later, then you know what the bill will be and can catch up if needed rather than being caught out – you don’t have to pay it any sooner after all!!