When you’re self employed everything you are paid will be untaxed and it is your responsibility to work out how much tax you have to pay. I worked with many clients over the years who have had the shock of a huge tax bill in January and July and then realised the importance of budgeting for your tax bill when you are self employed. So here are some top tips to budget for your tax bill over the year to help spread the burden and be ready to make your payments on time so you avoid penalties and interest charges (and a shock):
HMRC Self Employed Ready Reckoner
HMRC have a great tool which estimates your tax and national insurance. Input your earnings and it will give you an idea of your annual tax bill, its a really quick and easy way to estimate what you need to pay to help you budget your personal finances. Try it here.
Open a Deposit Account
Every time you receive a payment from a customer you can put away an amount away which goes towards income tax. Your accountant will advise on an appropriate amount but you could do this at the highest rate of tax you pay. You may find when you actually calculate your tax, take advantage of all allowances and reliefs that you are entitled to that you have even accumulated some savings.
Create a Budget
Creating a business and personal budget is the ultimate way you can start to take control of your finances. In your business budget you can incorporate a line for your estimated taxes to help you understanding whether you are earning enough to cover your costs and expenses.
Pay Yourself a Salary
Paying yourself a fixed monthly salary you will avoid the need to dip into your business earnings, assuming your business income is fairly predictable. When you reach your tax payment dates, the amount you need to pay HMRC should be fully budgeted for. If you have traded for a few years you may be able to work out the appropriate amount of salary you can pay yourself or just check with your accountant.
Pay HMRC an Amount Each Month
There is actually no need to wait to make your payment twice a year in January and July. You could consider making interim payments, even using a standing order, to pay a little amount of tax on a timely basis. It’s a nice way to move the money out of your account to where it ultimately needs to get to. You should probably note that HMRC won’t pay any interest on money held on account though and if your earnings do take a dip then you may be in a position where you have overpaid on your tax and need to submit a self assessment tax return to get a repayment.
Being self employed brings flexibility but also responsibilities, including budgeting for your tax bill and ensuring HMRC deadlines are met. Give it some consideration because late tax payments tend to result in hefty charges and interest.