I’m working on quite a few tax returns at the moment and last week I called one of my clients to have a chat about her tax bill. Her bill was quite a lot higher than last year's and as it was the first time her bill had exceeded £1,000 she was going to need to start making payments on account as well. Nobody likes to get big shocks about the size of their tax bill on an email so I wanted to have a quick chat with her to talk it through.
She pleasantly surprised me by saying “oh that’s no problem, I’ve been saving 25% of my profits every month so I have the money to pay my tax bill” and that was a relief for both of us, well done to her. But what should you do if you don’t have the money to pay your tax bill, and what’s a good way to budget?
How can I budget for my tax bill?
Your tax bill is going to be based on the profits from your business and any other income which you’ve received in the year. I'd suggest setting aside an amount every month so that when it's time to pay your tax bill, you've more or less saved up what you need. It can be difficult to estimate your tax bill (just wait until I get on to the section about the different tax rates and tax bands), so the best thing to do is to read no further and to speak to your bookkeeper or accountant about what they think you should set aside each month. If you don't have a bookkeeper or accountant, you have a couple of options.
1. Set aside last time's bill (with a few adjustments)
One thing you could do is to set aside the same amount as your tax bill was last year (provided your business activity and likely profit is going to be around the same level). If you're going to do this, keep in mind any changes in tax rates and allowances because they change every year and will affect your tax bill and you can find all of the current income tax and national insurance rates over on HMRC's website. I really can't emphasise enough that it can be tricky to fathom how much tax and NI you might need to pay (particularly if you're both employed and self employed) so I'd really recommend speaking to a professional if you're even slightly unsure.
2. Have a go at estimating it (but be ready for your estimate to be wildly inaccurate and get ready to ask for help if it gets complicated)
If you want to try to estimate your own tax bill using tax rates and tables it's really important to be tracking your income and expenditure. If you don’t already use an accounting system to track your business profits, I’d highly recommend that you look into using one as soon as you can.
You can then look up HMRC's tax rates and tables to find out which tax rates apply to your income. You should also keep in mind the different rates of tax and different tax free allowances for things like savings and dividends and don't forget that most people also need to pay national insurance contributions. National Insurance contributions vary depending on your income and there are different rates depending on whether your employed or self-employed.
If you're repaying a student loan your tax return will also calculate whether there are any repayments to make so there really is a lot of information to keep in mind here, and I'd advise you to speak to a bookkeeper or accountant if you're even slightly unsure.
3. Save a notional percentage
Some people (like my client) like to set aside a certain percentage of their profits every month and you might decide to do this instead if you're comfortable that you might have to make up the shortfall between your savings and your bill when you calculate it.
Saving for your tax bill might seem inconvenient, but keep in mind that if you’re employed, your employer will be taking money straight out of your salary each month anyway without you even noticing, so if you can see setting up a standing order to a savings account each month as the same as an employer taking tax at source, you should find it much easier to accept.
And what if I haven’t got the money to pay my tax bill?
I get it, life is expensive, sometimes the fridge breaks and you need a new boiler all in the same week and with the tax deadline coming just after Christmas, January can be an expensive and stressful month. If you haven't been able to save up and you can’t afford to pay your tax bill, speak to HMRC right away. There’s no need to wait until 31 January, as soon as you’ve calculated your tax bill, talk to them about your situation and to see how they can help. I'd also say that if you don't know your tax bill yet but you've got even a slight inkling that you won’t be able to afford it, calculate it now so that you at least know what you’re dealing with.
There are penalties if you pay your tax bill late, so speak to HMRC now and they can help you arrange a budget payment plan to get you back on track. Honestly, they want to help, I’ve never ever spoken to a horrible person at HMRC so get on the phone, here’s the number 0300 200 3310. And you can read about HMRC's budget payment plans on their website.
And of course, if you'd like to talk to me about your tax return, I'm always happy to help, please get in touch.