Have You Put Tax Aside for January 31st? 4 Reasons to Save
Author: Russell SmithOctober 14, 2015
It’s always tax season when you work for a chartered accountancy firm. We’re constantly thinking about how to make things easy for our clients. Don’t know how much to save for tax? Here’s what we recommend.
January 31st is a day all accountants have marked on their calendars. It’s deadline day: the last day of the year that you can file and pay the tax returns of the previous financial year without incurring penalties.
It’s an important one not to forget, but that isn’t the only thing you need to remember to do by January 31st when it comes to tax. You should also be saving throughout the year, putting money aside to foot that tax bill due before the start of February.
In this blog, we explore the reasons why saving for tax costs prior to January 31st is so important; from not knowing how much to save for tax, to avoiding troublesome financial burdens.
1. Avoid Lump Sum Payments
If you get to January 31st and you have no savings, you’ll be forced to pay out of your company accounts or own pocket. This can be a nasty sting! Tax bills rack up fast and can easily make it into the thousands, thanks to a combination of income tax, corporation tax, national insurance, VAT and more.
This kind of money is easy to acquire through a long-term tax saving plan over the course of the year. However, it can be a lot more troublesome if no arrangements have been made.
Unless your business is highly lucrative, immensely profitable and you have the majority of your earnings still sat in your bank, chances are you aren’t going to be prepared to be for a whopping great tax bill. Having to fork out large sums of money can damage not only your business’ ability to function, but your personal life, too.
Saving over the year instead of just paying what is due in January is a much less stressful way of dealing with tax.
2. Don’t Get Behind on Finances
So, you didn’t save all year for your tax. Then, you file your return early, in April for example, when the tax year officially ends. You get your tax bill and it’s thousands of pounds. You can’t afford that lump sum, so what do you do?
You have until January 31st to pay your bill, so the answer is obvious. Many business owners find themselves in this position, saving up to pay the taxman for the previous financial year in the current financial year. It seems like the problem is solved, but there is one major issue with this.
You are now lagging a year behind on your finances, which means if you came into hardships, had to shut your business down or tried to start a new project, you’d still be paying off the tax bill of the previous year while you were trying to make a fresh start. You don’t want to get caught playing catch up with the taxman, always a step behind. You may also find that your business was more successful in the previous year, so you end up cutting a higher percentage of your profits — a percentage that doesn’t reflect well on your current earnings.
Set off on the right foot. Save for tax during the tax year that you are currently within.
3. Don’t Know How Much to Save for Tax? Ensure You Have Enough
Knowing exactly how much to save for tax is really difficult, especially for a small business whose income is in constant flux. Unless you are contracted by another company or a regular client for annual work, you won’t know the precise numbers of your overall income until the tax year is over. This makes it hard to know how much tax you’ll need to pay.
Saving over time provides the perfect remedy for this issue, as it allows you to make adjustments based off your weekly or monthly income. For example, if you have a strong month, you save a higher percentage. If you have a month of low sales, you save a bit less. Once it comes round to tax season, you should have banked enough money to pay off your bill when the time comes to file your tax returns.
The added bonus of saving over the year are that if you don’t have enough, you will only have to find a small amount of money to satisfy the taxman. If you saved more than enough, you’ve got a nice welcome boost to your financial health.
4. Stay on the Right Side of HMRC
We’ve all heard some HMRC horror stories. Known to be worse than modern debt collectors, the government’s financial body in charge of taxation can be pretty ruthless when it comes to underpaid or unpaid tax.
Saving year round allows you to ensure you are on the right side of the taxman. Should you not save and encounter issues with payment of tax bills, the consequences can be severe.