While employees are taxed before their income enters their account each month, businesses and the self-employed must declare their income at the end of each year and pay the tax they owe in full. However, without careful planning and ongoing budgeting, some find that they don’t have enough money to pay the tax that they owe.
In this guide we’ll take a look at the options for businesses that find they can’t afford to pay, and how they can prepare for future tax bills in advance.
What to do if you can’t pay your tax bill on time
Being unable to pay the tax bill on time is understandably a cause for concern. Here we’ll run through a few common reasons why businesses are sometimes unable to pay their tax – and how to overcome these.
A lack of budgeting
With so many things to consider when running a business, it’s understandable that some businesses overlook the importance of budgeting to prepare for the end of the tax year.
If businesses haven’t set aside a percentage of their earnings each month, paying such a large sum of money all in one go can come as a shockand may even cause cash flow problems for months to come.
If your company has closed down
Any outstanding tax does not disappear when a company closes down, so if you went out of business or you stopped trading for whatever reason, you still need to pay tax on the money you earned up until that point. Some businesses find it a real struggle to pay their tax bill under these circumstances as they may not have the money behind them to make a large payment.
This is the first time you’ve had to declare your tax
For new businesses, and sole traders who are only just finding their feet, paying a tax bill can soon creep up.
Missing the tax return deadline currently incurs an automatic penalty of £100, with further fines introduced after three, six and 12 months. However, HM Revenue and Customs (HMRC) know that while some people don’t declare their income in an attempt to avoid paying tax altogether, many businesses are well-meaning and simply forget or cannot afford to pay. As a result, there have been suggestions that HMRC may put an end to the automatic £100 charge in order to cater for those businesses that have simply made an honest mistake.
As the charge is currently still in place, if you can’t pay your tax bill on time it’s important to contact HMRC as soon as possible. You may be able to extend the deadline or pay your bill in instalments. It’s important to discuss this as soon as you can, as you may have to pay interest on late payments and could be subject to penalties. HMRC can often set up payment plans to make things easier for you and to lessen the burden of one large payment.
How to save for a business tax bill
Prevention is better than cure, and it can save you money in the long run if you set a percentage of your income aside each month.
How much money should you put away
Money Saving Expert’s Martin Lewis recommends that businesses follow this mantra: “For every £100 I’m paid, £30 isn’t mine.”
He adds: “Every time you get paid, simply siphon off the tax cash into a separate high interest savings account.”
Businesses paying higher or top rate tax may need to put away 40 or 50 per cent of their income for the tax man.
Personal savings allowance
Everyone has a personal allowance of tax-free income. For most people this currently stands at £10,000, but different rules apply for people or businesses that earn over £100,000.
Businesses can apply for tax relief on certain expenses. By keeping a record of expenses throughout the year, you could reduce the amount of tax that you pay. You can include the following costs as expenses:
- Office costs
- Travel costs
- Clothing expenses
- Insurance or bank charges
- Business premises costs
- Advertising or marketing
If you’re ever unsure whether something can be classed as an expense, contact the HMRC Self Assessment helpline.
Finding the best account for you
For businesses looking to regularly deposit money into a business savings account, an easy access account is probably the best option. You’ll be able to make deposits as often as you wish, while still making the most of interest. While it’s best to save the money for the tax man, if you did need to access your funds in an emergency with the intention of paying them back before the end of the tax year, an easy access account will allow you to do so.
Fixed rate accounts often offer more generous interest rates, but you won’t be able to make regular deposits or access your money easily. However, careful planning can reap rewards; if you have a lump sum of money at the start of the year, you could place this into a fixed rate account, choosing a maturity date just before you need the cash back to pay your tax bill. This way, your money will be appreciating by earning interest when you don’t need it, becoming available just in time for when you do.
No matter which account you decide is best for you, it’s important to consider interest rates, as a good rate will ensure that the money you save works harder and grows over time.
For more information about how small businesses can save for their tax bill with the help of business savings accounts, please don’t hesitate to get in touch with the team at Aldermore.
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