For way too many business owners, their biggest stressor is, of course, tax. Or, more specifically, feeling completely in the dark about what they will owe.
Even the most prepared business owners often come to us, devastated that they saved for their tax bill all throughout the year, only to find the number on the return has come out WAY higher than expected!
If either of these resonate, let us reassure you – it’s not that you’re doing a bad job! It’s not that you’ve done the maths all wrong!
It’s just that there is a little more to predicting what you tax will be than simply setting aside 20%, and, the worst thing is, that the information explaining this is NOT readily available, or, if you can find it, it’s not written in plain and simple English!
So, here is your guide to getting a real good grasp on what you will owe on your tax return, and feeling fully prepared when the time comes!
If you are a Limited Company Director, scroll down, but if you’re a Sole Trader, stay right here!
Sole Traders
Do you have paid employment elsewhere?
- If so, how much of your tax free personal allowance has it used? (for most people this is £12570 per year)
- Also note down how much tax and National Insurance you have already paid through PAYE.
Is there any tax free allowance left?
- Eg, if you’ve earned £10000 in employment, you should have £2570 available to be used as tax free profits from your self employment.
- If your employment has gone over and above the tax free amount, you will technically be paying tax on ALL of your self employed profits.
What are your self employment profits?
- This is all of your sales, minus any allowable expenses
20% of your profits should be what you owe in tax
- As profits increase, for example over £50k, the tax rate increases too, so be aware of this (although, if you’re making this much, you should REALLY be operating as a Limited Company
(Blog Suggestion: When should I go from Sole trader to Limited Company?)
Will you need to make any National Insurance Contributions?
- More on the rates below! But for now, if you have paid NI through employment, you should be good! If not, you will have some contributions to make!
Limited Company Directors
Are you employed by your company?
- For most directors, taking the tax free allowance as a salary is the most tax effective way to get money out of the business, whilst reducing Corporation Tax
What were your dividends?
- After Corporation Tax, any profits left in your business are available for you to take as dividends (which are taxed at only 8.75%)
- Note that dividends are usually declared at the end of your COMPANY’S financial year, which may not be in line with the tax year.
Eg, your company year end may be 31st December, but the tax year ends 5th April. Therefore, the dividends will be dated 31st December, and included in the tax year that finishes the following April 5th. Yes, this can get a bit confusing, but just get yourself a good accountant who will deal with all of this for you.
(Blog Suggestion: What is the difference between Salary and Dividends?)
What is your total income?
- Tax rates and personal allowance rates change after the £50k & £100k income mark, so if you’re doing well enough to be up there, do seek clarification on what changes this means to your tax!
Great, but are there any other considerations?
If you’re completing your own tax return, you will see the pages and pages of questions asking about all kinds of other income, benefits & expenses that you may have had.
Instead of getting bogged down in them all, our general rule of thumb is –
IF YOU HAVEN’T HEARD OF IT, IT PROBABLY DOESN’T APPLY TO YOU!
But, some of the factors that DO commonly apply are…
- Property Income
- Pension Contributions or Payments Out
- Student Loans
- Child Benefit
- Marriage Allowance
- Other Shares & Dividends
If you are starting to get into complex territory by adding a few of these into the mix, we really do recommend you do yourself a favour and outsource your tax return to an a professional!
Okay, you mentioned National Insurance Contributions…?
Yes, we did!
If you are employed, then most likely you have made NI Contributions through your employment. And, NI Contributions are not made from dividends. (You can make voluntary contributions to top yourself up though…)
So, as a Sole Trader, it’s looking like this will apply to you.
Here are the current National Insurance rates (as of 23/24):
- Profits less than £6725? – You owe nothing! But you can make voluntary contributions to ensure you are covered for your pension
- Profits between £6725-£12570? – Although you may have escaped without tax, you will have to make Class 2 National Insurance Contributions at a flat rate of £3.45 per week (23/24 tax year)
- Profits between £12570-£50070? – 9% of this band of profit will be due as Class 4 National Insurance Contributions (23/24 tax year)
- And if you’re lucky enough to have profits of over £50070? Firstly, we BEG you to look into trading as a Limited Company And you will owe a further 2% of those profits in Class 4 contributions.
One last thing! And sorry, this might hurt …
If the tax you owe from your self-assessment tax return is more than £1000, HMRC will ask for 2 payments on account.
Each will be 50% of the tax owed, meaning that you’ll have paid the tax, and then the same amount again ‘in advance’ for the following year.
The first time it happens … this hurts! Then it does even out a bit. But, being prepared in advance is going to save you a lot or tears!
Don’t like the sound of the maths?
All of our clients receive in depth tax estimations throughout the year, as well as a tax planning meetings and regular business reviews so there are no nasty surprises, and they can sleep easy knowing they‘re as tax efficient as possible! Let’s have a chat!
