Poor January. Widely billed as the most depressing month of the year, it comes in with a bang and goes out with an HMRC Tax deadline day.
Worse, as media attention is usually firmly focused on the submission of your Self Assessment return, it can be easy to forget that you also have to pay the first of two payments on account for the forthcoming year.
A double-whammy, if you like.
If you found yourself going into January blind in terms of how much tax you owed, you may well have resolved to put better plans in place for next time.
Don’t leave yourself open to a horrible surprise next year.
Here are our tips to make sure you’ve put enough aside to cover your liabilities.
Big Question 1: How much should I save?
The best way is to maintain an employee mindset, deducting a proportion of your income “at source” and resisting the temptation to treat all your earnings as disposable.
Despite people’s misgivings about HMRC’s Making Tax Digital Scheme it should at least force better budgeting, with a regular payment scheme likely to see less people fall behind with their payments.
However, it doesn’t look likely that it will go live for the self-employed until at least April 2020, so in the meantime there are 2 simple methods you could look at to cover your potential liabilities.
First though, how much profit have you made?
As we’ve discussed before, there are lots of ways it pays to keep on top of your books - and here’s one more for the list:
If your accounts are up-to-date and you know what your profit is on a regular basis, then it is much, much simpler to accurately calculate how much to set aside.
Don’t forget that you can offset whatever is available of your personal allowance against your taxable profits - a full allowance is £11,850 for 2018/19.
Method 1: Save a set percentage
Many people simply save a fixed percentage - say 35% of profit.
One caveat here - if you’re going to proceed on this basis, we strongly suggest you seek professional advice upfront to make sure that the percentage you choose is sufficient to cover any higher rates tax and/or NI contributions that might be applicable to your specific circumstances.
Method 2: Use HMRC's Tax Liability Calculator
Alternatively, if you want to be more accurate and account for seasonal fluctuations and your personal allowance, the HMRC’s brilliant Self Employed Ready Reckoner lets you input your estimated weekly or monthly profit to work out how much Tax and National Insurance you’ll need to save.
Want to make sure your calculations are spot on? Our friendly tax team are on hand to help - why not get in touch today.
Big Question 2: Where should I keep it?
(AKA “How do I keep my hands off it?”)
Use a Separate Bank Account
The best suggestion is to open a separate bank account or ISA - which (unless you have consistent income or are amazingly good at resisting temptation) has restricted access and a decent interest rate (or as good as you can currently get, anyway).
This way you will benefit from interest earned on your tax savings pending payment to HMRC.
Looking for guidance? Here are the latest Savings Account picks from MoneySupermarket.com.
Use HMRC’s Budget Payment Plan
If you’d rather have it out of the way as quickly as possible, and are up-to-date with your Self Assessment payments, HMRC offer a budget payment plan where you can make regular payments on account in advance.
The plan can be paused for up to 6 months if necessary.
Be an Early Bird
Our final suggestion is to simply submit your return early and (if you want to clear the debt and get it out of the way) pay your liability. However we would stress that, no matter when you submit in the year, you don't have to pay what you owe until January 31st.
You can submit at any time following the end of the tax year on 5th April, and this will certainly help with any borrowings or tax credit applications.
Not to mention the happy smile on your Accountant’s face…