All good business owners know that it’s better to put money aside for tax liabilities than to get to the point of payment and panic about where it’s all going to come from. There’s nothing worse than the realisation that you owe more tax than you thought – and you are going to struggle to pay.
Good tax planning is part of good business practice. It helps you to budget, to plan ahead and to meet your tax liabilities calmly and on time. It doesn’t really take much to get into the right frame of mind – and if you use accounting software or have a friendly accountant, there are plenty of tools to help. Here’s our quick guide – for detailed support for your business, just give us a call.
VAT – if you use accounting software, there is usually a VAT return option. This will let you run a VAT-based report which will show how much you owe. If you go into the system and do this on a regular basis, you’ll know how much to keep putting aside so you can build up a pot of VAT money.
If you use Xero, you can find the Xero VAT Return by selecting Accounting/Reports/VAT Returns and then navigate to the current return. Then find the ‘VAT to pay HMRC’ box for the figure you need.
Corporation Tax – Corporation Tax is levied at approximately 19% of your taxable profits in the year – note that taxable profits are often different to accounting profits. For most small businesses, we can make a reasonable estimate based on the accounting profits in Xero or your chosen accounting software.
If you are doing your own rough calculations, take the profit on ordinary activities before taxation and take off the depreciation figure. Multiply this by 20* to give you a rough estimation.
Whether you get the correct figure will depend on the accuracy of your accounting data and there are some year-end adjustments that may change things – like how often you run your payroll, stock adjustments, prepayments and accruals. Remember that your business may not make profits evenly throughout the year, so take this into account.
PAYE and National Insurance – this is usually paid monthly and predicting these costs before reports are run will depend on how fixed your payroll is. Speak to your Payroll provider to see if they can provide predictions or produce reports earlier in the month to give you some visibility.
Personal Tax – when you plan out your salary and dividends for the year ahead, your accountant, should be able to give you an indication of the likely income tax due. Obviously, the more income you take, the more tax you will owe. If you take variable income, you need to be aware of the effect this may have on payments you make on account.
For all these tax issues, it’s helpful to get your accountant involved. They can help with regular data checks and management accounts to make sure that calculations are being made on the basis of reliable assumptions. And if you use accounting software, they can access that to make some tax predictions on your behalf.
If you’d like some accountancy advice related to estimating your tax payments, or you use Xero and you’d like to work with a specialist Xero accountant, please get in contact.
Please note: This is not meant to constitute professional advice. It is generic guidance only and things may have changed since it was written –please always seek specific & tailored advice for your circumstances.