January and July of each year can be stressful for freelancers and those who are self employed. If you are one of them, you probably know why – it’s tax time! More specifically, you need to have made two payments on account to HMRC and if you haven’t already budgeted or have excess of cash around you may feel the squeeze.
Here are some of the ways you can budget for your tax bill over the year to help spread the burden and be ready to make your payments on time so you avoid penalties and interest charges:
Open a Deposit Account
Every time you receive a payment from a customer you can put away an amount away which goes towards income tax. Your accountant will advise on an appropriate amount but you could do this at the highest rate of tax you pay. You may find when you actually calculate your tax you have accumulated some savings!
Pay Yourself a Salary
Paying yourself a fixed monthly salary you will avoid the need to dip into your business earnings, assuming your business income is fairly predictable. When you reach your tax payment dates, the amount you need to pay HMRC should be fully budgeted for. If you have traded for a few years you may be able to work out the appropriate amount of salary you can pay yourself or just check with your accountant.
Pay HMRC an amount each month
There is actually no need to wait to make your payment twice a year in January and July. You could consider making a payment, even using a standing order, to pay a little amount of tax each month. It’s a nice way to move the money out of your account to where it ultimately needs to get to. You should probably note that HMRC won’t pay any interest on money held on account though!
HMRC Self Employed Ready Reckoner
HMRC have a great tool which estimates your tax and national insurance. Input your earnings and it will give you an idea of your annual tax bill, its a really quick and easy way to estimate what you need to pay to help you budget your personal finances. Try it here.
Being self employed brings flexibility but also responsibilities, which includes managing your own tax and ensuring HMRC deadlines are met.