Skip to main content Skip to search

Archives for Budget

How to Budget for your personal tax bill

Was your tax bill in January a shock?  Were you scrabbling around to find the money to pay it – or not able to pay it all in one go?  This blog sets out how to budget for your personal tax bill so you are prepared next January.

The best way to budget is to pretend that you are employed. One of the big advantages of employment is that your income tax is taken out of your pay via PAYE before you receive it. You don’t have to worry about putting money aside, as it is done for you.

Putting a chunk of money aside each month from your self employment income is important to save for your tax bill.

The big questions is how much do you need to put aside? This will depend on your personal circumstances but there are some general steps to follow to work out how much to save:

 

1: Allocate your Personal Allowance

We all have a Personal Allowance – this is the amount we can earn before we pay income tax.  In 18/19, this amount is £11,850 and for 19/20 it will be £12,500.  If you are employed as well as being self-employed, your personal allowance is used against this income first, and anything left is used against your self-employment.  So, if you have employed income of £8,000 per year, you won’t pay tax on this, as you have used £8,000 of your personal allowance against it, leaving £3,850 this year to set against your self-employment.

If you are only self-employed, then you have the whole personal allowance to use against business profit.

 

2: Estimate your profit

You pay tax on your business profit – not your sales.  So you need to have an idea what your profit is, to be able to estimate your tax bill.  This is one of the reasons cloud-based accounting packages are useful, as you can see at any time the profitability of your business in real time.

If you not using an accounting package, then you need to estimate your profit by taking into account the costs of the business.  It doesn’t need to be 100% accurate at this stage, as you are only using it for guidance.

 

3: How much to put aside?

You have 2 amounts to pay on your profit.

  1. Income tax – currently at 20%
  2. National insurance. Being self employed you pay a flat rate of £146 for this year (class 2 NIC), but then you also pay class 4 NIC of 9% of your profit over £8060.  This often gets forgotten and can be a reason why your tax bill is higher than expected at the year end.

So in broad terms, you pay 29% in tax and NI of your business profit, after fully utilising your personal allowance.  For some, putting aside 30% of estimated profit is a good way of ensuring their tax bill is covered.

 

If this is your first year of self-employment, or you have earned more profit this year than last,  then you do need to think about payments on account of tax.

I have explained these in more detail in another blog (https://wilkinsco.co.uk/payments-account-tax) but in basic terms, self-assessment works on a system where we pay tax during the tax year on account of the current tax year.  We make payments in January and July on account of the tax year we are in.  If your first year of self-employment is coming to an end at 5 April 2019, you will calculate your profit and pay the tax due on that profit at 31 Jan 2020.

BUT at that time, you will also pay your first payment on account of your 19/20 tax bill, and that is calculated as half your tax bill for 18/19.  So at 31 Jan 2020, you have a double whammy and pay 150% of the tax you thought you were going to pay.   This is where you can be caught out if you haven’t budgeted as you go along!

 

Top Tips for Budgeting for your tax bill

  1. Get into the mind set that even though it’s in your bank account, it’s not all your money.
  2. Have a separate bank account for your every day business transactions (a good idea for SO many reasons!)
  3. Have a separate bank account where you save for your tax bill (any bank account will do)
  4. Put something aside each month – putting 25-30% aside is generally sufficient,but think about payments on account in your first year of business. Remember- putting anything aside is better than nothing!
  5. Once you have put it aside – forget about it. Don’t dip into just because it’s there – you won’t thank yourself in January!
  6. Use cloud accounting – not only will this help you estimate your tax bill, it makes your bookkeeping during the year so much easier
  7. Get your tax return done early. Doing it as soon as you can after the end of the tax year (5 April) will mean you know what you are going to owe the following January.  And your accountant will love you!

For more information, or for help with your sole trader accounts and your tax return, contact Rosie Forsyth at Wilkins & Co.

Read more

The Tax Wash Up

Another exciting time in the world of tax!

With the snap election and the dissolution of Parliament, outstanding bills had to be passed or scrapped before Parliament shut up shop and went on the election trail – and this process is called a Wash Up!

The Finance Bill is too important to be scrapped, so to get it passed in a hurry, lots of contentious clauses had to be dropped.

So what didn’t make the grade?

The headline area is Making Tax Digital.  I don’t expect in the long run this will mean we have seen the last of this, and it will almost certainly reappear under the new government, but for now it’s out!   It may not even mean that the timescale for introducing it gets delayed but we will have to wait a bit longer to find out.

Also out are the 2 new allowance I wrote about last week!  The £1,000 allowances for property and rental income that came in in April 17 are out again and have been scrapped!

Better news is the reduction in the dividend allowance from 18/19 from £5,000 to £2,000 has also gone.  This will please a lot of small business owners, but again it could well be reintroduced post election (depending on who gets in of course!)

Other provisions have been scrapped but the above are the most relevant to my clients.

There is a budget already planned for the Autumn and often a mini-budget post an election, so this tax hokey-cokey looks set to continue. Not great when you are trying to plan for your business or your clients!

 

 

Read more

What’s new for 2016/17

The new tax year is upon us so what’s new and what do you need to know about for the new tax year?

Personal Allowance
This has increased to £11,000 – this is the amount that you can earn this tax year without paying personal tax.  The next £32,000 of income will be taxed at 20%, and then 40% on earnings up to £150,000.


Personal Savings Allowance

A new savings allowance is introduced in 2016/17.  For basic rate taxpayers the allowance is £1,000 and for higher rate taxpayers £500. This means that no tax will be payable on savings income until the new savings allowance has been used up.

In a further change, banks and building societies will pay interest gross rather than deducting tax as they have done before.


Dividend Allowance

The way dividends are being taxed is changing – and most small limited company owners will be worse off.

The existing notional 10% tax credit on all dividends will be abolished and a £5,000 tax free dividend allowance is being introduced.

Dividends received above £5,000 will be taxed at 7.5% (basic rate), 32.5% (Higher rate) and 38.1% (additional rate), with no tax credit set against it as at present.

Limited company owners will therefore face tax bills on dividends taking from their limited companies – which could easily be avoided in the past.

Increase in the Employment Allowance

The allowance, which most limited company directors would have claimed at least in part in 15/16 is rising from £2,000 per annum to £3,000 per annum.  However it is no longer available to businesses where the director is also the sole employee, and therefore a lot of companies will no longer be able to claim it at all.

Abolition of 10% Wear and Tear Allowance for Landlords

The flat rate 10% allowance for landlords with furnished properties is being abolished, and being replaced with Replacement Furniture relief.

Tax relief will be given against rental income for the cost of replacing domestic items which includes moveable furniture, carpets, curtains, household appliances (fridges, freezers etc) kitchenware and TV’s.
So with lots to changes to be aware of as the new tax year starts, take the time to think about how they affect you and your business, and make sure you are being as tax-efficient as possible.

Read more