Paying tax as a business can be far more complex then when you paid it as an employee and making sure you don’t get caught out by a surprise bill needs some planning, this guide is quite technical but it should give you a headstart in managing your cash flows.
Limited company corporation tax is generally due 9 months after the company year end, depending on how much you earn as a director then you may also need to pay dividend tax which will be due on the 31st January following the end of the tax year.
One of the main advantages of working through a limited company is that you have the opportunity to control your earnings to stay out of higher rate tax and it’s important to seek professional advice so that you take money out of the business in the right way and don’t end up paying too much tax.
Sole-traders are required to pay their tax at three points during the year known as payments on account, let’s use the year ending 5th April 2016 as an example:
1st Payment: 31st January 2016 – Half of the previous year tax bill
2nd Payment: 31st July 2016 – Half of the previous year tax bill
Final: 31st January 2017 – Balancing payment or rebate depending on final tax figure for the year ending 5th April 2016, plus the 1st payment on account for the tax year ending 5th April 2017.
You may have noticed that the first payment is before the year end, the amount due here is an estimate based on how much tax you paid in the previous year.
If it was your first year of business then you don’t need to make any payments on account so the entire bill would be payable on the 31st January 2017.
If you’re expecting your profits to increase or fall then it’s possible to change your payments on account to reflect this so you don’t end up overpaying tax.
PAYE & VAT
Payroll taxes that you have deducted from employees, can be paid to HMRC monthly but need to be paid at least every quarter, they are paid by the 22nd of the month the quarter ended, for example, the tax deducted from employees between 6th January to the 5th April would need to be paid to HMRC by the 22nd April.
VAT is also paid quarterly and is due by the 12th of the second month after the quarter end, for example if the quarter ended on the 31st of March then the VAT payment will be due by the 12th of May.
HMRC accept a variety of payment methods and the easiest are often electronic payments, however you pay you will generally need to include a reference number so that HMRC can allocate the payment to your tax account.
It’s possible to pay self-assessment and corporation tax on a monthly basis if you don’t want to get stung by a large bill at the year-end or you could have a separate business bank account where you transfer money into every month and use that to pay your bill.
There’s some really good accounting software available to small businesses that are simple to use, not only do they save time when keeping records but they can also give you an idea of what your tax bill will be at any point during the year and how much money you need to set aside.
Shifting income within the family
It can be tempting to pay family members a salary or give them shares in your business to try and use up their tax allowances and basic rate tax band, be very careful if you do this and seek professional advice as HMRC have anti-avoidance rules that can cause you serious problems if they think you are doing something purely for the tax saving.
Whenever you get family members involved in the business they need to be paid at the market rate for their skills and the work they do and it’s also a good idea to keep a log as evidence of the tasks they complete.
Tax payments often require a lot of cash flow management and it’s common for small business owners to get caught out especially in the earlier years when they need cash to grow their business.
Thanks for taking part in our online course, Northants Accounting is based in Northampton and we act as the accountants for a range of small businesses both locally and spread out over the country, if you would like to find out a bit more about how we could help your business then please get in touch.