One of the hardest parts of owning a business is not knowing how much you will earn in the future. There is no steady paycheck, with added holiday or sick pay, and you have to balance both your business and household budget with no real certainty over your income.
Worse still, even if you manage to predict your income accurately, you still don’t know how much of it you can spend and how much you need to pay the taxman!
Unfortunately, no-one can predict the future or next year’s tax bill, and that’s why it’s impossible for your accountant to tell you in advance what that figure will be.
However, having a figure in mind gives you something to aim for, even if that figure is just an estimate. If you don’t have any idea at all, it can be easy to just put off thinking about it and hope that your tax bill will magically equal the exact amount of money in your bank account.
We’ve put together the following guide so you are not completely in the dark about your future tax bills. This guide is aimed at director/shareholders of their own limited company.
Please note this is a very simplistic method that can be followed if you want to make sure you will have enough money saved for the tax man. We’ve purposely overestimated the tax a little to allow a contingency for unexpected adjustments. That way, if the tax is less you get a nice bonus at the end, better than a nasty surprise when you don’t have enough.
Follow the steps any time you want to know what your tax bill might be, to make this even easier use ‘Your Ideal System’ to give you the key numbers at the touch of a button.
1. Calculate profit
You will be taxed on profit, not sales, so the first thing to do is estimate your profit. If you have Xero, run your Profit and Loss report and have a look at the bottom line.
If you don’t have accounting software you can follow this simple formula.
Sales X The income you receive from your customer.
Less VAT (X) If you are VAT registered you need to take this off first.
Net Sales X
Less costs (X) Add up all of your business expenses
2. Calculate your corporation tax
Your limited company will pay corporation tax at 19%. This will be due 9 months after your company year end.
So lets round this to 20% and you’ll have a small contingency built into your tax account. Put 20% of your money left over into a separate business account every month and you’ll have enough to pay your corporation tax.
This is especially important when your business is growing and profits are increasing as your corporation tax bill could be much bigger than it was last year!
3. Calculate your personal tax
Ok, this is where it gets a bit tricky. Let’s assume your accountant is doing some tax planning for you and has set you up with a tax-free salary and you are taking the rest as dividends.
For 2018/19 you have a personal allowance of £11,850 and a dividend allowance of £2,000, so that’s £13,850 tax free cash you can draw from your company.
It’s probably easier to look at this as a monthly figure so that would be £1,154 per month tax free.
Over that amount and you will pay tax on your dividends at 7.5%, 32.5% and 38.1%.
We’ve put a selection of drawing levels into the table below so you can see at a glance the tax you might pay at a certain dividend level.
|Total drawings per month||Estimated monthly tax bill 2018/19||Estimated annual tax bill 2018/19|
This gives you an idea of how much money to save each month towards your personal tax bill so that when it comes through you’ll have a figure that’s somewhere in the region of your actual bill.
Please note, this personal tax is due from your own money so you have to take this out of your drawings.
4. Get your tax return done nice and early
By getting your bookkeeping and any other information your Accountant needs for your tax return together as quickly as possible, you can get your actual tax payable figure with plenty of time to spare to get a bit more cash together or think of something to spend the excess savings on.
This approach is simplistic, the aim here is to save something towards your tax bill not accurately predict the future. Look back over your income so far this tax year and see how the prediction of tax differs to the amount of money you have saved in preparation.
If you haven’t got enough, don’t stick your head back in the sand and go back to blissful ignorance. Knowing where you need to be is the first step towards getting there. By keeping the figure in mind, you are more likely to end up with the right amount on the day Mr Taxman needs paying.
If you have any questions about the process or need any help, get in touch with the team at Stubbs Parkin.
This advice is relevant for the tax year 2018/19 and assumes you are the director of a limited company, taking the profits as an individual without any other significant sources of income. The tax amounts are dependent on your personal circumstances and the guide here is only an rounded estimation. Your Accountant will need to gather together all of your personal income together to calculate your actual tax bill.